Prospects for the future equitisation of the European listed market are bright and there are a number of routes to further growth but Germany remains the elephant in the room, as Sara Bellenda and Daniela Lungu report
The listed market keeps evolving and the equitisation process of the real estate sector is ongoing. The emergence of REITs in a number of countries in Europe in recent years significantly contributed to this. In some markets globally the listed route is the preferred way to invest in real estate. But European listed real estate shrank over the last two years, and remains under-represented globally. It accounts for around 15% of the EPRA/NAREIT Global listed real estate index.
By comparison, the European portion of the unlisted investable universe represents 38% (including German Open Ended Funds). Will this change in the future? Where lie the opportunities to expand the number of listed companies, their size and liquidity? Could this in turn contribute to renewed interest in the asset class from both generalist investors and asset allocators?
We remain constructive and see exciting opportunities for the equitisation process to continue evolving, namely through IPOs, M&A activity, secondary placings, structural changes across the banking market and the potential growth of the German REIT sector. We look at these in turn.
IPOs and fund raising
We expect to see more IPOs in the future across most markets. Since the availability of bank financing remains scarce and capital markets may dictate further on size and liquidity providing an exit for sizeable portfolios upon refinancing. It is difficult right now to predict with certainty how many potential offerings are in the pipeline. Since 2009, we have seen only four sizeable IPOs in the UK and none in continental Europe. In many cases, the IPOs were cash boxes set up to take advantage of cheap and/or distressed buying opportunities in the market. But the biggest hurdle has been sourcing enough acquisition opportunities to justify returning to investors for follow-on raisings.
Banks have been slow in releasing assets, although there are signs that this is changing. A significant number of European banks need to reduce their exposure to real estate to meet their capital requirements. This will create two opportunities: firstly, for the existing property companies to buy impaired assets; and secondly, for the banks to list new REIT vehicles.
M&A activity & secondary placings
We expect further consolidation here. REITs require capital both from equity and debt markets to exploit acquisition opportunities and/or to implement their expansion strategies, and many smaller companies may struggle to do so sustainably. Last year there was some M&A activity in France when Icade acquired Mines de la Lucette. More will probably happen this year. There was similar actvity in the Netherlands with the announced merger of NSI and Vastned Offices.
Regarding secondary placings, there has already been a large number during 2010: Sponda, Deutsche Wohnen, Safestore, Helical Bar, Beni Stabili, Corio, to mention few. The largest source of secondary placings will probably continue to come from continental Europe. For example, Spanish investors own sizeable stakes in French SIICs and any disposal of these, would boost both transparency and liquidity.
The most prominent case is Gecina, where three major investors own 58.3% of its €5.4bn market cap. Gecina would become a candidate for the CAC40 index if the stock was placed in the market. We estimate almost €4.0bn could come from secondary placings of Spanish investors in France alone, including SFL and Siic de Paris. But we may not see all of this in 2011.
Structural changes in banking
An interesting development to watch is certainly the restructuring of the banking system across Europe, including Spanish and Irish banks. Property in the hands of banks and/or government-sponsored entities (NAMA), should be seen as a major source for both private sector but, more likely, public market. Having vehicles with access to the listed market should be a meaningful strategy for banks to either facilitate these assets to be refinanced by replacing existing debt with fresh equity or, if the companies are already fully consolidated on the banks balance sheet, by providing an exit route to the banks.
This is by far the most fascinating subject when it comes to equitisation of the real estate market.
The real elephant in the room in listed real estate is Germany. With less than 1% weight in the EPRA Global index, the largest European economy is hardly represented. G-REITs introduced in 2007 have so far failed to attract sizeable interest from either German institutional or retail investors. Much of this is due to the sheer success of the German open-ended funds (GOEF) in the last 15 years, which prevented any other type of real estate investment to flourish - so far.
GOEFs have recently made the headlines mostly due to the sizeable redemptions and fund closures rather than because of their successful acquisitions or net inflows. There are funds worth €25bn currently closed to redemptions, or roughly a third of the total GOEFs. The German Investment Act is currently being reviewed. The changes aim at protecting retail investors and provide a mechanism to manage redemptions and maintain liquidity.
If approved in the existing form, the proposals include a minimum holding period
of 24 months for new investors, minimum notice periods and a phased redemption
process. In other words, new investors will no longer be able to withdraw funds daily, which had always been one of the key attractions of GOEFs. The amendments do not concern existing investors.
However, the immediate implication could be that existing investors will seek alternative forms of liquid investments as GOEFs may no longer function as a money market account. Although these rules are applicable to new investors only, the viability of open-ended structures remains debatable and, failing to attract new investors, GOEFs could become obsolete.
In the meantime, a portion of the institutional investor money could be re-allocated to Spezialfonds, often run by the same banks providing the GOEFs offering. But these are open to institutions only. There does not seem to be an alternative product suitable for retail investors yet. EPRA is active in ongoing discussions with the German regulator to increase awareness and attractiveness of listed real estate.
Ultimately the end investor may not fully understand the risks of investing in GOEFs and the implications of the upcoming law amendments. Education and awareness should be key. The new legislative changes regarding valuation practices should both improve transparency and ensure that redemption values more closely reflect the true value of the property in the fund.
In conclusion, though there is work to be done, there are a number of opportunities in the listed market. Against a backdrop of recovering European property values, the equitisation of European real estate is well placed to develop.
Sara Bellenda (left) is director, portfolio manager, Continental Europe, CB Richard Ellis Investors - Global Real Estate Securities; Daniela Lungu is director, portfolio manager, UK, CB Richard Ellis Investors - Global Real Estate Securities