GLOBAL – The potential mismatch between cost of capital and counter-cyclical market opportunities is one of the chief challenges for public property companies, according to PGGM's head of listed real estate.
Speaking at IPD's European conference in Lisbon last week, Hans O'pt Veld argued that listed real estate companies often had greater access to capital to take advantage of buying opportunities, despite being affected by share-price volatility.
Op't Veld was responding to an assertion from the audience that listed companies invariably had the highest cost of capital – due to lower share prices – when property assets were at the lowest prices, and vice versa.
Bernardo Pinto Basto, chief executive for Spain at Norfin, asked: "How do you reconcile the incentive to buy assets in times of panic, when arguably the best opportunities exist when your share price tumbles and your cost of capital implicit in your shares is at an all-time high? Do you buy your own shares? How do you compete with unlisted capital?"
Pinto Basto, who joined the Iberian fund manager Norfin from Macquarie Group in 2010, made the observation in the context of Spain's recently reformed REIT regime, the SOCIMI.
"There is a lot of talk about the new REIT vehicle coming to the market," he said. "I'm quite excited about it from a tax-efficiency perspective."
Pinto Basto was concerned about how such a vehicle would be "exposed to market sentiment", which could also be problematic in bull markets, or, as he described, during times of "mania".
He added: "Where is your incentive to sell when actually your capital hasn't been as low-cost in a long time and your incentive is to borrow more capital and buy assets in the worst time possible? You should be selling and giving your capital back to your investors."
Op't Veld conceded that this was "one of the challenges" for the listed market, but he suggested listed companies were still in a better position to play the cycle than many non-listed funds that experienced financing difficulties, some of which went bankrupt.
"In all circumstances, you want your investor to have access to capital, preferably both in equity and on the debt side," he said.
"One of the things that speaks for REITs in general is that access to the debt capital markets usually is excellent, particularly in the US and Asia, but also increasingly in Europe."
Op't Veld added: "Whereas we see that a number of [private funds] went bust in the global financial crisis, we haven't seen incidents like that occur in the listed real estate space. So, yes, your capital probably is expensive in distress, but at least there is capital."
Op't Veld, who had been asked to speak about the merits of listed real estate versus other property investment approaches, argued that the liquidity of the sector made it possible to target listed companies that were expected to have good access to capital during market cycles.