European listed property could be in line for €75 bn in capital inflows over the coming years following real estate's elevation as a stand-alone sector in the global benchmark for equity indices.
This is the main conclusion of research published by the European Public Real Estate Association (EPRA) at its annual conference in Paris on Wednesday.
At the start of September real estate became the 11th industry sector in the Global Industry Classification Standard (GICS) for equity indices, which is the reference for stock indices compiled by MSCI and S&P. This is the first new sector introduced since the creation of GICS in 1999 and results from real estate being extracted from its previous position within financial stocks, which should result in much lower levels of volatility, or risk, for investors and also highlight the positive dividend income yields that REIT structures provide, according to EPRA.
'Global listed real estate has come of age,' Philip Charls, EPRA CEO, told the conference. '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. A stand-alone 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.
'It underpins what EPRA research has highlighted for years: the inclusion of real estate stocks in a portfolio means that over the medium term investors can access the returns of the direct property market with the added advantages of much greater liquidity and lower costs.'
During an afternoon session at the conference, Alex Moss, chairman of EPRA’s Research Committee, presented a research paper exploring the topic.
Real estate has trebled its share of global equities market since 2009
Elevation to a stand-alone sector in GICS for equity indices follows a tripling in real estate's share of the global equities market to 3.5% currently, from 1.1% at the trough of the market cycle in 2009. A combination of equity fund raising and strong investment performance has powered a surge in the free float market capitalisation of the FTSE EPRA/NAREIT Global Developed Index to $1.48 tln (€1.32 tln) from $508 bn during the same period.
The growth in the global listed real estate market is due largely to the expansion of tax-efficient real estate investment trust (REIT) regimes, which now make up 70% of the Global Developed Market Index. REITs distribute most of their rental income cash flows as dividends, and are thus gaining favour with investors seeking income and capital value growth in the prevailing low interest rate environment.
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.
One of the reasons for removing real estate from the GICS Financials sector (the largest of the 10 industry sectors with a 20.25% weighting under the former treatment) was the low correlation in the performance of property stocks relative to other equities classified as Financials, such as banks. This is supported by the relative volatility of listed real estate and financial stock indices. The 10-year volatility of the FTSE EPRA/NAREIT Developed Europe Index is 19.4%, whereas for MSCI Europe/Financials it is 29.52% for the same period. Changing the listed property sector’s status should therefore reduce volatility to levels that are closer to that of the underlying direct property.
Reduced volatility, improved risk profile
The volatility of listed securities has been the main reason referred to by European institutional investors for why they do not allocate to listed property. The decoupling from Financials is expected to improve the risk profile of REITs and start attracting new allocations.
The potential for these additional investment capital flows is enormous, even though attracting the money would be a gradual process. Roughly half of European institutional real estate investors, with €3 tln in total assets under management, do not currently invest in listed securities. If their allocation was to match that of their European peers who do invest in property stocks, at roughly 2.5% of AUM, then the listed sector would gain €75 bn worth of additional investment going forward.
Moss, who is also managing director of Consilia Capital, concluded: '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. 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.'
