EUROPE – As much as €186.5bn of potential real estate investment could flow into European stock markets over the next few years as a result of the continent's companies hiving properties off into separate funds, academics have found.
Dirk Brounen, professor of real estate economics at the TiasNimbas Business School within Tilburg University in the Netherlands, found that a significant portion of European companies plan to change the way they manage the property they own.
The companies are being spurred into action ahead of new International Financial Reporting Standards (IFRS) regulations, he said in presenting a study supported by the European Public Real Estate Association (EPRA) at the association's annual conference in Paris.
When companies were asked if they were considering carving out their corporate real estate as a separate fund, 13% of survey respondents in Europe said they were now doing that.
Given European total market capitalisation of €10.2trn, and with real estate making up 14% of balance sheets, Brounen said: "You're looking at €186.5bn of potential real estate that might end up in the stock market over the next few years."
From 2016, the new IFRS lease accounting standard will eliminate off-balance sheet accounting, meaning all assets that companies currently lease under operating leases will be brought onto the balance sheet.
Following implementation, the effect of the new rules on accounts will therefore be visible in annual reports in 2017.
"This means analysts will be able to see this, and how companies deal with their real estate will raise questions on the outside," Brounen said.
He told the conference how companies that are not involved in real estate, but need real estate to operate, have begun to recognise their property as a discrete asset with a bearing on shareholder value.
Brounen termed this development "corporate real estate acceptance" and said it started in 1983 when Sally Zeckhauser – then president of Harvard Real Estate, which managed the US university's property – wrote a report on the issue.
As well as showing that property often amounts to one-quarter of non-real estate company balance sheets, Zeckhauser also found company management were often unable to quantify the property they owned.
In Brounen's survey of 291 companies conducted this year, he found that 34% of companies still do not know how much real estate is as a proportion of their assets.
The survey, which included 221 North American companies, 45 from Europe and 25 from Asia, also revealed that almost 30% of companies in Europe said they were waiting until a late stage to implement the required changes to comply with IFRS.
"This is much more common for smaller companies than larger ones," Brounen noted.
Brounen told the conference it was hard to say why European companies were lagging behind US companies in separating their real estate, but he speculated this could be partly due to the fact specialist REIT vehicles had not been available at an early stage in the region.
Asked whether companies were likely to use listed or non-listed funds to hive off their real estate, Brounen said this depended to a large extent on the industry and type of real estate involved.
"If it's very standardised, you could use the listed market easily," he said, but added in this case it would need to be very transparent.
He also noted that the unlisted market had the advantage of being easily accessible for companies, particularly for smaller companies.