Editor's Choice: Charlie's Angels

EPRA’s CEO Philip Charls had a new bounce in his step at the annual conference of Europe’s listed real estate organisation in Berlin this week.

One of the reasons was a new initiative that Charls announced at the conference to create more diversity in Europe’s listed property sector. The campaign – a mentoring initiative to help lift the representation of women in top management – has been dubbed ‘Charlie’s Angels’, he joked in an aside.

But the real reason Charls seemed to stand taller in Berlin this year was that Europe’s listed real estate sector has recovered a significant stretch of ground lost in recent years to its counterparts in the US and Asia. The last time Charls addressed EPRA delegates in Berlin in 2012, Europe’s share of the global market index had fallen to just 11%. Since then it has grown to 18%, he told the conference.

This is not quite back to its long-term average of 20%, but a significant turnaround nonetheless.

The growth of Europe’s listed sector has also been fuelled in recent years by the introduction of REIT regimes, in particular in Ireland and Spain but also Austria and Sweden. ‘Ireland and Spain are two countries that have accelerated from the starting blocks in the past three years,’ Charls said. ‘EPRA has lobbied relentlessly for REITs at the national level in both these markets and also Italy, where the re-capitalisation of distressed markets was essential and these governments needed to step up their game.’

But the real star in Europe’s listed real estate firmament is Germany. Just a few years ago, Europe’s largest economy was punching below its weight in terms of its listed property stocks but this year the country overtook the Netherlands to become Europe’s second-largest listed market, behind the UK. Market capitalisation for German listed property companies stood at €48 bn in mid-August, a 73% increase year-on-year, having briefly touched the all-time record of €50 bn earlier in 2015.

Germany is also driving the recovery of Europe’s listed property sector, with 2015 on course to be the second record-breaking year in a row for real estate activity, according to research from the German property federation ZIA.

Share prices of listed German firms outperformed the broader European market, with EPRA Germany achieving an increase of 31% year on year compared to 19% in the UK. Germany also saw record levels of equity issuance in the first half of 2015, with €4.7 bn of equity being placed in the markets, the same amount as in the whole of 2014, which was itself a record year.

Heavy bias towards resi in Germany
Germany’s listed real estate sector may be breaking records, but it is still heavily reliant on its residential specialists and has a long way to go to become well-balanced and diversified, delegates at EPRA’s annual conference in Berlin heard earlier this week.

Germany’s listed residential sector is attractive because the country is seen as a safe haven and there are not many other listed residential companies in Europe, noted Hans Op ‘t Veld, CEO of real estate at Dutch pension fund PGGM. ‘But,’ he added, ‘I think it will be harder for Germany’s (listed) companies to expand in the commercial segment. Alstria Office REIT has done some work on this front, but it will be difficult for others to agglomerate portfolios.’

There is demand for a large investible liquid real estate sector in Germany, but it will be harder for investors to accumulate mega commercial portfolios, agreed Peter Barkow, managing director of Barkow Consulting. ‘I don’t see it. We have a strong transaction market in Germany, so there is no reason for vendors to put an expensive infrastructure in place to sell their portfolios.’

One way of building scale in the office sector would be by encouraging real estate owners with quality assets to remove them from their balance sheet, Alan Supple of Fidelity suggested. ‘German corporates own a lot of real estate, the state does too. Sale-and-leaseback offers a real challenge.’

The spectacular growth of Germany’s listed real estate sector in recent years has been driven by large IPOs in the residential sector, in turn spurred by financial sponsors shedding their portfolios, Barkow added. The German residential sector currently accounts for 88% of Europe's listed resi property market, he noted. ‘I don’t see the commercial sector replicating this tremendous growth.’

German pension funds low on stocks
While Germany’s listed sector has clearly witnessed a ‘sea change’ in terms of scale and liquidity in the past six years, it still has a long way to go before it is included in the portfolios of German pension schemes. Their exposure to securities in general and listed real estate stocks in particular has traditionally been non-existent. Historically they have invested in open-ended real estate funds or Spezialfonds (institutional open-ended fund vehicles.), but a large number of these funds are now in wind-down mode, Anna Weickhart, senior investment consultant and research manager at Towers Watson in Frankfurt told the conference.

‘That may be a trigger for more exposure to securities,’ she added.

Another reason that German pension funds have steered clear of securities is their abhorrence of volatility. But here too, the evidence is starting to stack up in favour of the listed sector. Research presented at the conference shows that German pension providers are missing out on higher returns by excluding real estate stocks from their portfolios. A study by Consilia Capital found that a typical Spezialfonds could almost double its annual raw investment return from 2.88% to 5.42% by reallocating 30% of its resources to a ‘buy and hold’ real estate element.

The change also increased the fund’s volatility from 1.03% to 6.53%. However, the study found that implementing a ‘trend following’ equities trading strategy, based on a 10-month moving average, increased the blended portfolio’s performance to 6.94%, with a smaller increase in volatility to 3.45%.

Alex Moss, CEO of Consilia Capital, said: ‘The improvement in performance by blending real estate stocks into a non-listed German institutional property portfolio is dramatic, for a limited rise in volatility or risk, our research shows. The additional benefits of investing in real estate equities, such as improved liquidity, the scope for strategic property-sector diversification and yield enhancement, are not reflected in these figures.’

Vonovia effect
Weickhart is hopeful that the inclusion of listed German residential specialist Vonovia in Germany’s main DAX index, may provide an impetus to further institutional investment in listed real estate stocks. The fact that Vonovia is included in the index of top 30 companies in Germany is a milestone, she said. ‘This will promote the asset class, particularly to local investors,’ she predicted.

The current ‘challenging’ level of fixed-income yields will act as a further impetus, according to Edgar Kresin, head of treasury at the ministry of finance of the state of Sachsen-Anhalt,. But a sea change any time soon on this front is unlikely, he added. ‘We’re coming from a 100% focus on fixed income, it will be hard to persuade our management to move into other asset classes like securities.’

Charls has every reason to feel proud of the huge strides Germany's listed property sector has made in recent years. But the message that came through in Berlin this week is that the country's pension schemes will be slower to step up their pace.

Judi Seebus
Editor in chief