European listed real estate could attract €75bn in additional investment flows as a result of changes to global equity indices, according to the European Public Real Estate Association (EPRA).
Last week, real estate investment trusts (REITs) and other listed property stocks were given their own standalone sector in the Global Industry Classification System (GICS), the reference for stock indices compiled by MSCI and S&P.
EPRA, which promotes the European listed real estate industry, said the new classification could attract institutional investors that had been concerned about the volatility associated with public markets.
Real estate was previosuly included in the financials sector, despite the former exhibiting consistently lower volatility.
The decoupling from financials is expected to improve the risk-profile of REITs and start attracting new allocations, EPRA said, which launched the report at its annual conference in Paris today.
Philip Charls, EPRA CEO, said: “The attractive investment credentials of these companies should be clear to all equities investors, now that they are no longer included in the large financial services sector with its higher overall volatility.
According to the research, the 10-year volatility of the FTSE EPRA/NAREIT Developed Europe Index is 19.4%, significantly lower than the 29.52% for MSCI Europe/Financials over the same period.
The report said the volatility of listed securities had been the main reason why European institutional investors did not allocate to listed property.
Although capital flows resulting from the classification change are not expected to be immediate, the potential volume is “enormous” should investors adjust their allocations accordingly, EPRA said.
The research estimates that roughly half of European institutional real estate investors (which own roughly $3trn in assets) do not currently invest in listed real estate, while the remainder on average allocate approximately 2.5%. If the former were to match that allocation, it would divert €75bn of capital to the market.
The ability of real estate to produce strong income returns is also expected to be highlighted by the change in GICS classifications – at a time when interest rates are low and institutional investors are seeking alternative sources of yield.
The current average dividend yield of the FTSE EPRA/NAREIT Global REITs Index is 3.67% compared with 3.43% for the MSCI World/Financials Index, EPRA said.
REITs distribute most of their rental income cash flows as dividends, so gaining favour with investors seeking income and capital value growth in the prevailing low interest rate environment, it said.
Charls added: “A standalone real estate sector is recognition that listed property companies are an important investment sector in their own right, standing shoulder to shoulder with telecommunication services, healthcare and other mainstream industries.”
Alex Moss, chairman of the EPRA research committee, said: “The GICS move is likely to be replicated by other major equity indices providers, given the momentum of growth in the global listed real estate sector.”
Moss, managing director of Consilia Capital, added: “We are witnessing the increasing maturity of real estate as an asset class with the listed property sector becoming a credible and sizeable complement to fixed income and general equity investments.”
Last week, IPE Real Estate reported that generalist portfolio managers will now need to increase their holdings in listed property to reflect the new sector weightings – or take the risk that performance might vary from the benchmark.
The September/October issue of IPE Real Estate contains an in-depth analysis on the impact of making listed property a separate industry sector.
