Can German investors stop worrying and learn to love listed property?
European Public Real Estate Association (EPRA) chief executive Philip Charls believes German listed property's time has come. At the organisation's conference this month, he claimed Germany could be at the forefront of European listed real estate, doubling its market cap over the next five years.
On the face of it, given equity volatility over the past couple of months, it seems like an odd time to be pushing securities. But Charls reckons that, with the market having entered a phase of lower returns combined with less leverage, liquidity and transparency are at a premium.
Above all, there's a significant loss of faith in the 50-year-old open-ended fund (GOEF) model, and listed offers "a very competitive alternative", says Charls. If institutional investors were sufficiently miffed at not being able to get their cash out of these funds when they needed to, a mandatory minimum two-year holding period has made the structures even less attractive.
Speaking to IP Real Estate from the Merrill Lynch global real estate conference in New York, Urdang portfolio manager Alan Supple claimed pension funds were "still smarting" from not being able to raise cash via GEOF redemptions.
"Even if they're still committed to indirect because of better returns, they're keenly aware of liquidity," he said. "These are strategic allocations - they'll probably hold real estate assets for the long term - but they still want short-term liquidity."
Of the €90bn still invested in open-ended funds, 30% of it isn't available because the funds have closed, according to Ralf Dibbern, investor relations spokesman for Alstria, a G-REIT.
Alstria chief executive Olivier Elamine has long called for regulatory intervention to encourage GOEFs to convert to REITs, citing Unibail-Rodamco as examples. Detoxifying open-ended funds? More investment in listed real estate? Unibail-Rodamco was one, became the other and survived the recent stock market volatility relatively unscathed.
"The fact Unibail-Rodamco is trading at a premium says something about the quality of its assets," says Dick Boer, executive director of corporate finance for European real estate at Kempen.
Here's the clincher for listed: there are few alternatives. The weekly deluge of new Spezialfonds targeting institutional investors doesn't solve the liquidity problem. "For the kind of liquidity these investors are after, there's no real alternative to an exchange-traded security," says Supple. "Most of us would argue that, with relatively low interest rates, the yield on listed real estate is still a pretty attractive proposition."
What listed will not do
There's plenty of European property market to go round: potentially €1trn, according to EPRA, and listed only represents 1.5% of it. So how come?
The primary reason is German institutional aversion to equities. Property companies like the German listed market because they've been able to raise €1bn in it over the past year. German institutional investors, on the other hand, do not. Equities account for 8% of overall fund investment.
Another caveat is that listed anticipates unlisted trends. What happens in listed happens quicker and harder, but sooner or later it will come round to unlisted. "It actually exaggerates the direction," says Boer. "You have much higher market volatility and higher swings."
The result is that you see the same bias in listed and unlisted: toward high-quality assets with long leases and strong tenants. Six months ago, investors were beginning to look at the gap between core and in secondary locations or assets needing some work were seeing that there was good relative value to be had.
"Now they're back to wanting security of income," says Supple. "The companies that have done well have been larger and more liquid, with assets that are bulletproof and relatively conservative financing."
Then, of course, there's volatility - though it's easy to draw the wrong conclusions from it. Boer reckons investors are offloading stocks with the greatest exposure to euro-zone sovereign risk, with some investors already having priced in the collapse of the euro. Yet German withdrawal from the euro-zone is more likely. "I don't think it will happen, but it would be great for investors," he says. "Real estate values would go up. Spain would devalue, and Germany would appreciate."
Another argument against the inevitability of a shift toward listed, according to Dibbern, is the vested interest of banks. Although listing GOEFs would significantly increase the volume of the listed German real estate sector - after all, one reason the listed sector is so small is because the unlisted sector is so big - if they were to list, the banks would lose their commission income.
In any case, it'll take time, and it'll take the EPRA, to have much impact on GOEF conversion, let alone investor appetite for listed. "The politicians in Berlin have enough problems to worry about without listening to a bunch of guys in a small real estate company in Hamburg," says Dibbern.
Look out for the September/October edition of IP Real Estate magazine, which includes a report on the German listed real estate market by Alex Moss of Macquarie Global Property Securities Analytics and Fraser Hughes of EPRA.