Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Southern European REITs Are Outperforming the Core
Transcript
- Lucas: If you look at the European ETFs this week, the VGK, which tracks the broad developed European market, is up about one percent in the last five days. But peel back the hood and there's a real split happening underneath. Luna: The German ETF, EWG, is actually down slightly — negative zero point one percent. Meanwhile the Spanish and Italian ones are leading. That's not random. Lucas: Exactly. And the story I want to drill into today is why Southern European real estate investment trusts, or REITs, are crushing their northern peers. It's not just a tourism bounce — though that's part of it. It's structural. Luna: So we're talking about property stocks in Spain, Italy, even Portugal, versus Germany and France. What's the big number? Lucas: Year-to-date through late June, the FTSE EPRA Nareit Developed Europe index is up roughly eight percent. But the German subsector? Flat. Spanish and Italian REITs are up closer to fifteen percent — double the average. Luna: Fifteen percent in a rate environment that's still restrictive. That's a strong signal. What's driving it? Lucas: Start with tourism. Southern Europe had a record summer in 2025, and 2026 is tracking even higher. That flows directly into hotel REITs, retail property in tourist zones, and even residential in cities like Barcelona and Madrid. Occupancy rates are at multi-year highs. Luna: But tourism alone can't explain a structural repricing, right? Because those markets were already tourist-heavy before. Lucas: Right. What's changed is the fiscal backdrop. Countries like Spain and Italy are channeling NextGenerationEU funds into urban renewal and energy retrofitting. That's driving up property values in commercial districts that were previously stagnant. Meanwhile, Germany is contending with a commercial real estate hangover. Luna: The German office market specifically. We've talked about that before — remote work and higher rates hit Berlin and Frankfurt harder than Milan or Madrid. Lucas: Yes. German office vacancies hit eleven percent in Q1 2026, according to data from JLL. That's the highest since 2005. And repricing is still happening — sellers and buyers haven't found a clearing price. So REITs sitting on office assets are underperforming. Luna: Meanwhile, the ECB hasn't cut as aggressively as the market hoped. The deposit rate is still at three point two five percent. That's higher than in the US, actually, relative to inflation. But Southern European REITs seem to be pricing in a different macro scenario. Lucas: Exactly. The market is betting that the ECB will have to cut faster to support the periphery, even if core inflation — which hit three point four percent in May in the US, but in the eurozone it's lower — stays sticky. Lower rates mean lower cap rates, higher property valuations. And REITs are leveraged to that. Luna: So Southern European REITs are trading like a call option on ECB easing. While German REITs are still discounting a recession. Lucas: That's a great way to put it. And if you look at the actual yield spreads, Spanish ten-year bonds are yielding about ninety basis points more than German bunds. That's actually narrowed from one hundred and twenty a year ago. So the risk premium on Spanish assets is shrinking — and REITs have ridden that wave. Luna: Is there a risk that this outperformance gets crowded? I mean, everyone loves a story about Southern Europe rebounding. Lucas: There's definitely a valuation risk. Some Spanish REITs are now trading at price to book ratios above one point two. That's not bubble territory, but it's not cheap either. And if tourism hits a snag — say, a geopolitical shock or a new virus variant — those stocks would correct hard. Luna: But for now, the momentum is clearly on their side. What about Italy specifically? Lucas: Italian REITs are a bit more complex because the market is smaller. But the ones focused on logistics and data centers are surging. The e-commerce penetration in Italy is still below the EU average, so there's catch-up growth. And government incentives for digital infrastructure are creating demand for warehouse space. Luna: So the play isn't just hotels and offices. It's logistics, data centers, even student housing in some cities. Lucas: Exactly. The diversification is real. Now, one thing I want to flag — the FX angle. The euro has weakened slightly against the dollar, from one point one six to one point one five just this month. That's a tailwind for dollar-based investors in European REITs, but it also reflects capital outflows from the eurozone. Luna: Right, the trade-weighted dollar index hit one hundred twenty point four. That makes US assets more attractive. But if you're a European investor looking for yield, where else can you go? Bunds are yielding two point four percent. Spanish REITs are yielding four to five percent. Lucas: And with dividends, some Italian REITs are yielding over six percent. That's hard to ignore in a world where cash yields are low. Speaking of which, if walking through the economy with us has made something click, and you've gotten value out of hearing about these specific numbers and strategies, you know what supports the show. Luna: Yeah, it's a small gesture that keeps this ad-free and independent. Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Just that. It matters. So back to the REIT divergence — the key takeaway is that the eurozone property market is not monolithic. The dispersion is likely to widen before it narrows. As long as the ECB stays cautious on cuts, Southern markets that are growing faster and have better fiscal support will keep outperforming. Luna: And for listeners who want to track this, which ETFs would you watch? Lucas: The broad ones — VGK, EZU, FEZ — but also the country-specific ones like EWI for Italy and EWP for Spain. They've been diverging from EWG, the German ETF, and that divergence itself is a signal. If you see EWG start to catch up, that might mean the German CRE market has found a floor. Luna: But for now, the floor hasn't arrived. Lucas: Not yet. And until it does, the Southern European REIT story has legs. The question is how long the market can look past the macro headwinds. Luna: And whether the ECB will validate the bet with faster cuts. Lucas: Exactly. That's the tension at the heart of this trade. We'll be watching the July ECB meeting closely.