The US REIT market surged by 5.4% on average in the past weeks as it became increasingly clear that the Fed would soon resume rate cuts:
But some foreign REIT markets not only missed out on this rally, but even sold off in recent weeks, making them quite a bit cheaper than their US peers.
Rate cuts are happening on a different schedule elsewhere in the world, so some of this disconnect makes sense. But over the long run, there is a significant correlation between the monetary policies in the US and in Europe. Both economies are closely linked and therefore, slower growth in the US is likely to spill over into Europe, pushing the European Central Bank to also cut rates.
Similarly, global factors like energy, supply chains, trade wars, etc., drive inflation, leading to similar pressure to cut or hike interest rates.
Finally, capital flows are also global. If the Fed cuts, even as the ECB keeps rates steady, the dollar may weaken, putting pressure on the ECB to follow. Rate cuts in the US could also increase demand for European stocks, particularly REITs, from US-based investors as they look for better, higher-yielding alternatives.
All of this to say that the recent disconnect between the US REIT market (rising) and the European REIT market (declining) could be an opportunity to accumulate more European REITs, while they are historically cheap. This volatility is driven by interest rates, as their respective Central Banks are cutting rates on a different schedule, but over the long run, this should correct itself with a lag.
This brings us today's opportunity: Xior Student Housing (XIOR / XIORF)
We initiated a position in the company in January this year, and I was disappointed to see it surge ~10% shortly after, missing our chance to bulk up our position.
But it has now come back down to our initial purchase price, even as more good news has come out from the company, which makes it an even better deal than it was back in January.
You can read our full investment thesis by clicking here, but in short, Xior is the leading student housing REIT in Europe, operating in many different countries, with the Netherlands being its biggest market.
This property sector is today severely undersupplied, with occupancy rates at near-100% and 6 students fighting for each bed in its portfolio. As a result, the REIT is enjoying steady 5%+ annual rent growth, and this is unlikely to change any time soon.
The supply is limited because the locations near university campuses are commonly already built out in Europe. There is also significantly more red tape in Europe than in the US, and construction costs are very high.
Meanwhile, the demand is growing as Europe attracts a growing number of foreign students. European universities offer some of the best value for money worldwide, with high education standards and free or very low tuition. Beyond tuition, living costs such as rent and food remain significantly lower than in most other Western countries.
Limited new supply coupled with growing demand is a recipe for steady, strong rent growth, and it also provides the REIT with new opportunities to develop additional properties.
I think that the rent growth part of the story is clear to the market. But the development angle is today underappreciated.
The company has a significant pipeline of new projects that are expected to come online later this year and in 2026, adding over 1,500 new units to its portfolio. This is expected to provide an additional €13 million in annual rent, and most of these projects have already been paid for, with just another €24 million of capex.
This is very significant.
Between the rent growth and the development projects, the company projects that its total rental income will rise by nearly 20% in the two years from 2024 to 2026:
These development projects will soon start to contribute significant new rental income, and yet, the market appears to be overlooking them.
It will increase the cash flow, improve the leverage metrics, increase the average quality of the portfolio, and ultimately create more value, leading to a higher NAV per share.
The company's last appraisal had its NAV at €38.74 per share, and that's with a conservative 5.89% yield applied to the portfolio.
I think that as interest rates come back down, and Xior's properties continue to enjoy strong, steady growth, we will see significant cap rate compression for these assets, which will then lead to a much higher NAV. If the valuation yields drop to the mid-5s, even as its NOI rises from rent hikes and new development projects, the NAV per share would surge closer to €45 already in the near term.
Yet, today, you can still buy shares at just $28.65, and we are not passing on this opportunity:
We cannot predict how long it will take, but eventually, we expect a repricing at a slight premium to its NAV, which, coupled with some cap rate compression and higher NOI, has the potential to lead to 50%+ upside. While you wait, the company is paying you a 6.2% dividend yield that's well-covered, and they keep creating more value.
This is quite exceptional, coming from a REIT with such high-quality assets and clear growth prospects. This growth is also largely detached from the broader economy, which only makes the risk-to-reward more attractive in today's uncertain world.
Finally, as a reminder, Xior's management is well-aligned with shareholders, owning about 10% of the equity, and they have an amazing track record of growth on a per-share basis. Despite the historic surge in interest expense, they have managed to maintain their FFO per share at €2.21, and growth could resume in 2026 as new development projects come online and rates are cut lower levels:
Closing Note
The Fed is expected to cut later this month, and the US REIT market has surged in response. The ECB is expected to cut a few months later in December, but European REITs have dropped lately.
We are happy to take advantage of this market disconnect by accumulating more European REITs in the near term.
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Analyst's Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. We also own a position in FarmTogether. High Yield Landlord® ('HYL') is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other, and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.
To clarify for US Investors: European universities are typically located in large cities, competing with all real estate, in contrast to American campuses witch are often "stand-alone villages" (at least to my impression).
How do you buy this on US markets?