An Investment Solution for Structural Market Trends Ahead

We believe Pan European real estate equities offer a compelling investor solution to three structural challenges that investment allocators increasingly face:

• Persistently higher inflation
• Growing demand for resilient income as investor demographics age
• AI driven disruption and the need to own Heavy Assets with Low Obsolescence (the ‘HALO’ trade)

At the same time, the sector trades at near record P/E ratio discounts versus broader equities and at deep discounts to NAV, despite asset values having already materially adjusted since 2022. This combination has created an asymmetric opportunity in a sector that remains fundamentally under owned.

Inflation protection through real assets

Historically, listed real estate has commanded material valuation premia during prolonged inflationary periods, reflecting its ability to deliver attractive real returns. This is driven by rising rental income, either directly via inflation‑indexed leases or indirectly through higher market rents as construction and replacement costs increase.

As illustrated in the graph below, this relationship between inflation and real estate equity ratings has been robust over time. The notable exception was 2022, when the sector failed to perform as expected despite an inflation shock.

Source: Datastream, Morgan Stanley Chartbook May 2026

The market’s response to that episode has been to largely avoid the sector altogether since geopolitical risks resurfaced and inflation expectations re‑emerged. However, we see today’s starting point as fundamentally different from 2022:

Key differences between 2022 and today

In short, the inflation sensitivity that failed in 2022 is now being priced as a permanent impairment — an assumption we believe is increasingly untenable.

Resilient income for an aging investor base

Aging populations, combined with the likelihood of more entrenched inflation than in the past two decades, suggest resilient income with growth potential may see structurally high demand ahead from investors.

Following the repricing of property yields and equity valuations, pan European REITs today offer:

• Highly tangible, contractually underpinned income from contracted leases
• Inflation‑linked income growth (particularly in Europe)
• Largely fixed or hedged debt costs
• Visibility and resilience that compare favourably to general equities

At the same time, the prevailing geopolitical and macroeconomic backdrop raises clear risks to consensus earnings expectations for broader equities. Historically, real estate equities have traded at materially higher P/E multiples precisely because of this earnings visibility, derived from diversified portfolios of long‑dated leases. That such a resilient earnings stream is currently valued at historic low equity multiples relative to the wider market (illustrated in the graph above) appears highly irrational.

The HALO Trade: Owning Scarce, Low‑Obsolescence Assets in an AI‑Driven World

As AI accelerates the disruption of asset‑light and intangible‑heavy business models, capital is increasingly gravitating towards Heavy Assets with Low Obsolescence (HALO) — physical infrastructure that is difficult, capital‑intensive, and increasingly costly to replicate.

High‑quality real estate fits this profile precisely. Well‑located property represents a physical necessity rather than a discretionary input, and its relevance is largely insulated from technological substitution.

Despite this, we believe listed real estate currently offers one of the cheapest and least crowded ways to gain exposure to the HALO thematic.

While the sector briefly began to re‑rate as a perceived HALO beneficiary earlier this year, this progress has reversed on renewed (and, in our view, overstated) concerns regarding inflation and interest rates. The result is a compelling valuation disconnect.

To truly be a beneficiary of the HALO trade, we focus on segments where tenants must locate, even in an AI‑disrupted economy:

• Rented residential (notably Germany) and social housing 
• Logistics, warehouses and storage
• Healthcare properties
• Prime retailin dominant locations

While offices as a broad category do not meet this test, a niche area within this subsector does: best‑in‑class, energy‑efficient offices in major capital cities — where, in addition to major corporates’ headquarters requirements, AI and technology firms are also emerging as an increasingly important tenant base.

A contrarian, but fundamentally uniquely positioned cyclical opportunity

In the near term, real estate equities are likely to remain sensitive to market expectations around borrowing costs — reflecting investors’ lingering anchoring to the sector’s performance during the early stages of the Ukraine war.

However, history suggests these turning points often arrive abruptly. Notably, the catalyst for the powerful real estate bull market of the early 2000s was the onset of the Second Iraq War, when central banks responded to slowing economies and surging oil prices by cutting interest rates.

For investors who see parallels between today’s macro backdrop and that earlier period, Pan‑European real estate equities represent a rare opportunity to allocate to:

• An unloved and under‑owned sector
• Offering inflation protection
• Providing HALO exposure in an AI‑driven world
• Delivering resilient, growing income
• At near‑record P/E ratio valuation discounts and deep discounts to NAV

In our view, whilst acknowledging the sector’s short-term volatility and correlation to interest rate expectations, this combination presents a compelling medium‑term return opportunity that few have yet to recognise.

Alex Ross

Fund Manager