Carraighill’s research is focussed on understanding investment opportunities across a range of areas including banks, private equity, asset management, and the real estate sector. For now, our geographic reach is Core Europe, the UK, Scandinavia, Eastern Europe and Turkey. Both the geographic and coverage list will grow in time. 

As we review an idea, we aim to fully understand its ecosystem. Our systems based research concentrates on the key long term (structural) and short term (cyclical) drivers of the top and bottom line of each sector, within each country. This is an exhaustive activity that distils billions of data points into clear logical insight and trends. However, this work allows us to better understand the drivers and the risks in each investment opportunity, above what is stated in company accounts. 

This process also allows us to apply our time to individual companies that appear more interesting (long or short) for a given initial condition i.e. price. We aim to generate 8-10 exceptionally well researched bottom up investment recommendations on listed companies each year for our clients. Our target time frame of positive return is generally between 6 months and 3 years. 

The value of The Carraighill Approach when looking at REITs 

In 2020, we produced a selection of stock reports on European Real Estate Investment Trusts (REITs).  

Our work to date has focussed on the retail and office sectors. Both are facing significant challenges including a rapid transition to online sales, work from home, travel restrictions, social distancing, and an increased level of unemployment. There are positives in some areas of retail, including population growth, higher consumption levels, lower interest rates and an industry profitability and productivity profile that facilitates higher household cash flow in certain regions.  

Our understanding of the ecosystem allows us to see how a structural trend in one sector can influence another. For example, growth in online payments (and those companies) may have negative implications for retail REITs (e.g. Unibail and Klepierre). It may also allow a more positive outlook for growth in rents and volumes of industrial warehouse space (e.g. SEGRO). 

How it varies by geography 

In Germany, the share of the population aged 15-74 has only grown modestly over the last 10 years (weakening housing demand). This somewhat offsets the positive demand impact of falling new lending rates, growing employment and higher wages (all aid affordability). The share of shopping online is now 16% of total retail sales, up from c. 7% in 2010 (a headwind for retail REITs).  

In neighbouring Poland, the overall population is expected to stagnate until 2030 and then decline. Although it has one of youngest populations in Europe with a median age of 41, the number of people in the key consumption and house buying age cohort (25-44) is forecast to fall from 11.4m to 9.2m by 2030.  Online retail sales are growing strongly, and households have low leverage (with debt to GDP of c. 35%).  Allegro (a Polish online e-commerce platform) has recently listed in this region, as it seeks to capitalise on potential growth in this area. 

Sweden is different again, with a fast-growing young population, one of the highest levels of online sales in Europe, and exceptionally strong household cash flow. Even though household debt is high, a very productive economy allows this debt to be sustained and grow. Interest costs are a share of household discretionary spending power (HDSP™) are also falling, supporting demand. 

The biggest risk in Sweden is arguably political and related to population. At the 2018 parliamentary election, The Sweden Democrats achieved 17.5% of the popular vote and 62 seats (out of 349). Its support has grown consistently since 2010. Its key message is to radically reduce the number of asylum seekers entering the country. 

In summary, the Carraighill approach seeks to

  1. Understanding the data and ecosystem. 
  1. Present system Insights in a format that is readily understood. 
  1. Develop a long-term perspective on the opportunities and risks.  
  1. Produce comprehensive bottom up research recommendations. Our team commits time to the ideas that add most value. 

REITs framework: Fundamental bottom up research 

If you would like to access the reports mentioned in this article, Carraighill Research Access enables you to access these and other thematic and sectoral research through our secure online portal. If you would like to speak to a partner or analyst on the topics raised in this piece, you can contact us here.