Real estate spreads show resilience in tariff sell-off

European credit spreads have been widening significantly since last week’s tariffs announcement, but for the real estate sector, the moves have been less aggressive than for other sectors. Real estate spreads are around 13bp higher on average than last week and widened by 6bp yesterday. This compares to a widening of 19bp for Euro corporate credit over the last week, with a strong risk-off move yesterday of 6bp.

The relative outperformance of real estate bond spreads since US President Donald Trump’s tariff announcements is driven by several factors, including:

1. Rents will continue to be paid – More limited exposure to and impact from US tariffs. Most real estate companies operate domestically, and the proportion of revenues from the US (excluding US companies) is relatively limited. In addition, despite rising recession concerns on both sides of the Atlantic, real estate should be relatively insulated as people and companies tend to continue paying their rent and lease costs during downturns.
2. Rates compression – Market interest rates compressed last week, and the curve bull flattened. Markets are also now pricing in a higher level of cuts from the European Central Bank this year (around 80bp or just over three rate cuts) compared to around 60bp at the start of last week. Lower rates and a flatter rates curve are positive for the real estate sector, given the sensitivity of the sector to market rates.
3. Coming from a lower base – The real estate sector remains in recovery mode, and spreads were already more elevated than other sectors. Furthermore, property valuations have already seen steep declines in recent years, while property yields are also still elevated. This may have helped cushion the blow in the current credit risk-off environment.
4. Rebalancing of supply chains – Relocation of capital to Europe and ‘nearshoring’ options for European business, industry and defence manufacturing may have offset some of the tariff concerns – particularly for some affected subsectors, including logistics and retail. German infrastructure spending plans also help here.

Peeking at equity markets, the EPRA Developed Europe Real Estate Index is down 6% since the start of last week, compared to the EURO STOXX 50 Index down by 11%. This indicates that the financial markets view real estate as a relatively safe haven compared to (most) other sectors.

To be clear, we still expect European real estate credit markets will continue to face upward pressure on spreads, in line with the broader market (as our Credit Strategy team outlines HERE), but so far real estate has been a good place to hide.

Still, we think real estate spreads can remain more resilient in the tariff-induced widening and volatility currently driving markets. The real estate spread premium over Corporate BBB’s is now just 8bp, the lowest since 2021. Additionally, as shown below, the real estate sector yield has nearly converged with Corporate BBB’s. If recession risks increase in Europe, certain subsectors are more exposed (Hotels, Retail and lower-quality Offices), although our ING economics team currently rules out a severe European recession.

As mentioned, we believe direct impacts from tariffs are limited for the real estate sector. However, we recognise that indirect effects such as lower exports, higher uncertainty, lower investments and weakening labour markets could slow or stall the real estate sector’s recovery. While this could put pressure on demand and occupancy rates, these effects should not really impact credit metrics.

Also, higher spreads can put pressure on funding costs, although so far this has been mitigated by the decline in interest rates. Our ING rates team also has a bullish bias in rates for now, and European rate curves are bull flattening today again as we write.

For property valuations, there is a likelihood that lower interest rates on recession concerns won’t translate into lower property yields. Further, slower growth dampening property demand and slowing rental income growth may put upward pressure on property yields. However, property values have declined by 15-30% since early 2022, and current yields are around 150-200bp higher than in 2021.

How real estate sectors might be affected by tariffs and macro weakening:

Spreads have also reflected this by subsector since the tariff announcements. Hotels, Logistics and Mixed (diversified names with main exposure in Offices & Logistics) have underperformed. While Residential and Healthcare have remained resilient. Offices has seen an average widening. Interestingly, Retail has remained relatively resilient, although this is likely to have been driven by the large, high-quality names, including Unibail (URWFP) and Klepierre (LIFP) remaining more liquid over the past couple of days.