Chilly in Athens

Athens was a mighty setting for a shaken industry, but delegates were upbeat as they welcomed EPRA's new CEO Philip Charls. Martin Hurst reports

The main talking point as the 2007 autumn conference season got underway was, not surprisingly, then credit crunch and the impact of this on real estate markets. The conference was notable for the increased nervousness and skepticism in light of the current turmoil. Ian Hawksworth, managing director of Capital & Counties chaired the first panel entitled ‘Where is the product?' "The situation is very different now to how it was before the summer in light of developments in the debt market," he said.

Wolfhard Leichnitz of IVG Immobilien said that "investors need to look at how companies manage not just property risk but also financing risk."

Barden Gale, CIO of ABP Investments said that he was "very concerned about the US consumer. There has been a huge amount of equity withdrawal and construction is almost at a standstill. Easing interest rates will help the banks but mortgage resets will still slap consumers in the face." Matthew Quinn of Stockland said: "We are absolutely in denial." He added: "There is a mountain of evidence that says that things will get very bad soon." He also said that "deals must be capability rather than capital led for the long term benefit of investors".

This year's Academic Circle looked at the issue of sustainability. Session chair Professor Tony Ciochetti of the MIT Center for Real Estate said that "sustainable real estate is about the long run and it's about shareholders, the environment and employees. Some 70% of all energy consumption relates to real estate, but there is very little awareness of real estate carbon emissions."

He continued: "There is significant untapped value of buildings that can benefit from an energy efficiency upgrade. Often tenants are not educated and owners do not have the ability to measure."

The thing many don't realise, he said, are that "the real gains are in workplace productivity, which swamp all other benefits in terms of pure financial benefit. The payback is 0.75 years in terms of labour productivity, compared with six years in terms of energy usage."

Professor Graeme Newell from the University of Western Sydney said: "There needs to be a corporate responsibility strategy, a corporate environment management plan and sustainability leadership appointments and more engagement with tenants on sustainability issues through ‘green leases'. He concluded: "EPRA has a significant role to play in supporting more best practice on a European level." 

It was notable that when Ciochetti asked delegates whether they would be willing to invest a premium in a sustainable asset delegates he received a very muted - almost negligible - response.

JPMorgan presented research highlighting the growth potential for REITs in Europe. The research, entitled "European REIT development", forecasts that €140bn of new equity will be added to the European capital markets in the long-term.

In a session on UK REITs Robert Fowlds of JPMorgan Cazenove said that the treatment of interest on intercompany loans is "extremely troublesome and clarification
is required." He said that clarification was also needed regarding the effect on tax of voluntary versus involuntary exit."

G-REITs also came in for scrutiny during the conference. In a panel session chaired by Ronald Wijs of Dutch law firm Loyens and Loeff Jon Kriz, managing director at Moody's  Investor Service introduced the characteristics of the ideal REIT. He pointed to three key attributes - first, the ability of the REIT to invest in any kind of property - "if there are constraints the ability of the company to add value will be constrained," he said. The other key characteristic is that the company's ability to invest should not depend on the location of the asset.

The third is that development should be permitted - which Kriz identified as "key to a company's future growth". Other important features include the need for rapid conversion, the use of basic corporation law (ie "keep it simple"), the need for all earnings to be dividended and the fact that the decision regarding the use of internal or external management should always be a matter for the REIT and its investors. The same applies to the use of gearing - "I have never understood the limits on gearing imposed from the outside," he said. Hans Volckens of Beiten Burkhardt noted that the German system falls short in that residential is excluded and investing abroad is not without problem.

Volckens noted that the discussion took so long because it was "too focused on tax." The discussion concluded with outgoing EPRA CEO Nick van Ommen who said that EPRA was "ready to support with knowledge and money Germany or any other European country to create a REIT structure."

The award for the best company report was presented to Quintain Estates. For the last three years the judging has focused on the most improved company. The runner up was Rodamco.

"IFRS has helped a lot," said Wibo van Ommeren of Deloitte which carried out the survey. "Before its introduction, UK companies were always the best performers in terms of reporting because the UK is strict on disclosure requirements. The situation is similar in the Netherlands."

He noted that in some countries "it is also a matter of history, culture and mindset. Germany and Sweden have been disappointing because companies in those jurisdictions are much more reluctant to disclose details because of a fear that this would mean giving away company secrets.

The main problems have been in the area of the management report and portfolio information. IFRS has brought these and other countries more into line but more education is necessary."

Hans Bruggink, director of reporting practices at EPRA said that cross-border investment was driving much of the improvement.
"This is the most important stimulus," he said. "Investors and analysts are asking for more and more. Now companies are disclosing more to avoid the constant phone calls."

This conference was the last for Nick van Ommen, EPRA's CEO since its launch in 2000. Philip Charls, formerly of the Dutch Chamber of Commerce in Brussels took over in October. In an interview with IPE Real Estate he referred to tax harmonisation as being "one of the key issues facing the association and the wider industry."
Charls added that work on the convergence of accounting standards is an area where stimulation is needed. He spoke of the success of the indices and the need to enhance them in cooperation with FTSE and NAREIT. He said that there was also a need look at why some funds, such as REITs in the UK, are traded at a discount while those in continental Europe are trading at a premium.

As for the liquidity crisis "this is a situation for now - it will not change opportunities over the next two to five years. There is still plenty of opportunity."

Charls has been in the financial business for 25 years - more on the retail side, but the work gave him experience of working with the different asset classes. "At the Dutch Chamber of Commerce I turned the organisation round from bankruptcy, like Nick van Ommen did with EPRA. Furthermore I am familiar with private sector institutions - where if you don't create value for the members you will be out. And finally, Belgium, where I have spent most of my working life, is a mix of northern and southern European cultures which is useful for me in this position as head of a European association."
The pan-European REIT is something EPRA have steered clear of discussing in the past but the new CEO referred to it as "an important opportunity, but one which may take a lot of time. We have to talk with our partners and the European bodies. I have worked in Brussels for 30 years so I know how the machinery works."   

Just before the conference EPRA had its third meeting with the new alliance of associations consisting of EPRA APREA, NAREIT, BPF, REALPAC (the Canadian property association) as well as the Japanese and Koreans. "This is definitely the way to  go," Charls said. "We have so much in common - tax issues, indices and regulation. There is no point reinventing the wheel."

Charls referred to sustainability as a "highly sensitive area for members" but where legislation is moving things forward. "We have a social responsibility as an industry, although to introduce best practice on sustainability for the real estate industry would be a bridge too far. But the matter is on everyone's agenda."