The European Public Real Estate Association (EPRA) launched its annual conference with positive numbers and predictions of growth for the sector. Buoyed by a spate of IPOs – most notably in Ireland and Spain – the European listed sector is also expected to grow because of institutional allocations shifting in its favour.
EPRA said Europe’s share of the market capitalisation of the global real estate investment trust (REIT) market could rise to 18% by the end of next year, from just under 16% – or €145bn – at present. Speaking at a press conference the previous day, Exane BNP Paribas analyst Nick Webb said Europe’s listed sector was more diversified following more IPOs, and he expected 2014 to be a record year.
Investment strategy changes by institutional investors suggest, EPRA said, a “fundamental shift” towards greater listed real estate allocations, particularly in Europe.
EPRA chief executive Philip Charls said investors had “bet on the real estate recovery story”. He added: “We’ve seen the strongest European property IPO market in 20 years. These factors have combined with new ‘state of the art’ REIT regimes in Spain, Ireland and, most recently, in Italy. Europe is back.”
But the opening conference sessions in London highlighted how vulnerable listed property companies in Europe are to macro developments that have the potential to be highly disruptive.
The US – birthplace of the REIT and home to the biggest listed real estate market globally – is facing the prospect of rising interest rates as its economic recovery strengthens. The euro-zone, in contrast, is staring into the abyss of deflation.
As economist Andrea Boltho noted ominously, the euro-zone is one economic “shock” away from slipping into that abyss and meeting its Japan-like destiny. Ian Shepherdson of Pantheon Macroeconomics, whose presentation plotted “unsustainable” labour cost increases in Italy and France – said his principal concern in the euro-zone was France, which had the potential to “ruin” Europe.
The dreaded d-word would be likely to disrupt European property companies’ investment strategies for the next few years. But it is not just economic dysfunction that threatens. Technological innovation could be one of the biggest sources of disruption.
At two separate panels on the retail and office markets, the discussions were all about technology. In the case of retail, the focus was on the competition from online retailers. Richard Perks of market research firm Mintel revealed that online retail only accounted for 10% of the market – and 5% were ‘pure-play’ online retailers. But this is likely to change.
In the meantime, retail landlords are having to innovate to survive in a ‘omni-channel’ world. For Unibail-Rodamco, Europe’s largest retail REIT, the focus is on being more selective when bringing brands to its shopping centres. As CEO Christophe Cuvillier said, it is also about using technology to engage directly with customers and to provide experiences for shoppers that cannot be had online.
The technology industry is also driving changes in the office sector, mostly as tenants. Joe Borrett, director of real estate and construction at Google, talked in “volumes” rather than floorspace and in “cubic metres” rather than square feet. Its new office in London’s King’s Cross will be a flexible space that evolves with its tenant’s requirements. He described it as a “theatre” where the “production” changes all the time.
Paul Williams of Derwent London – which is behind the flexible office development the White Collar Factory in London’s Old Street tech quarter – also spoke of providing “blank canvas” offices where the focus is on collaboration and the sharing of ideas.
David Rowan, editor of technology magazine Wired, summed up the situation by invoking Moore’s Law, which has successfully predicted the rapid pace of growth in computer processing power. “Exponential change will keep rewriting the rules,” he said.
But Europe’s commercial real estate sector stands to benefit from increased allocations from pension funds. Speaking on a ‘Secure Future’ panel, Create Research chief executive Amin Rajan said with the “days of double-digit returns for pension funds gone”, he expected an increase in real estate allocations to around 12% in the near future. Rajan said: “Asset allocations are changing.”
REITs were “seeing rising allocations”, he told delegates. “The liquidity they offer is the main attraction.” The vehicle also offers smaller pension funds without in-house expertise an entry point to the commercial real estate sector, Rajan said. “Outsourcing is happening and that serves the need of small pension funds,” he said. “Real estate is generally seen as a good asset class with regular cash flow, yield and protection against inflation.”
NAPF chief executive Joanne Segars, who joined Rajan on the panel, told delegates that pension funds were now more diversified but still had core needs. Real assets, including infrastructure, offer pension funds liability-matching returns, she said. “That’s what they’re all focused on,” Segars said.
There is, she added, no “blanket approach” to commercial real estate asset classes. “It’s more sophisticated than that – the concept of traditional real estate asset classes is breaking down.”
Europe’s €145bn listed commercial real estate sector – tipped to take 18% of the global index by the end of next year – should be able to attract Asian capital, said panel moderator and Internos chairman, Jos Short.
Japan’s moves towards real estate were also on delegates’ radars, with the expectation that an allocation to the sector by the country’s state pension fund could eclipse that of Norway’s oil fund.
Although there was plenty of room for optimism at this year’s conference, caution was urged by Great Portland Estates chief executive Toby Courtauld.He said that leverage levels were a potential risk. “This is still a property cycle,” Courtauld said, adding that gearing could still pose a threat to the listed sector.
An increase in the amount of IPOs – most recently between French REIT Klépierre and Dutch retail specialist Corio – was also raised. Speaking on EPRA’s investor sentiment panel, APG global real estate managing director Patrick Kanters said the Corio merger was a “no-brainer”, with the opportunity to combine expertise and skills in retail an obvious positive.
Courtauld remained positive on prospects for the property sector, saying that there was still a “rental story” to be told following recent yield compression. The panel predicted returns of 6-12% in the coming year.
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EPRA Annual Conference: REIT sector buoyant despite the threat of disruptive forces