Little scope for German listed sector to expand beyond resi, EPRA delegates hear

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.’

Resi IPOs
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 the listed property market, he noted. ‘I don’t see the commercial sector replicating this tremendous growth.’

But the days of mega resi portfolio deals are also over, he said. ‘Portfolios of 50,000+ units are not there, it’s even hard to find portfolios of 20,000+ units. Further strong growth in this sector will be difficult.’

Since 2009, Germany’s listed real estate sector has mushroomed from a market capitalization of just €1.5 bn to almost €50 bn, Barkow pointed out. ‘That is 20 times the size it was six years ago.’ The German sector now comprises five companies with a market cap in excess of €2 bn while Germany is now the second highest weighted country in the FTSE EPRA/NAREIT Developed Europe index behind the UK. During the last 12 months, Germany has also surpassed the Netherlands.

Sea change
In the past six years, Germany’s listed sector has witnessed a ‘sea change’ in terms of scale and liquidity, said Alan Supple of Fidelity. ‘In the past, the sector was punching way below its weight versus other markets. The universe of companies that we can really access is still smaller, but there are some proper and serious companies that are liquid. The German listed sector is now 15% of the European component of EPRA’s global index. It is a legitimate sub-sector, although it is dominated by resi. The commercial sector is still very small.’

Asked what is needed for further growth of the German listed real estate sector, Supple pointed to the debate on corporate governance. ‘One of the big issues is the need to improve the consistency of disclosure. German companies are way behind on that.’ No German residential companies have yet won a silver or gold standard in terms of EPRA’s best reporting practices, he added. ‘We want a set of metrics that we can use as a basis for discussion. But there is a willingness, Vonovia (formerly known as Deutsche Annington, ed.) is a leader. We’ll get there.’

German listed real estate companies do not have a culture of deferred compensation based on the long-term return of companies, he added. ‘There is a level of interest, and this is not just a German issue. But management needs to be incentivized to create a better outcome.’

There is an opportunity to improve on this front, agreed PGGM’s Op ‘t Veld. ‘The German culture is relatively closed but management needs to realize that investors have changed and want to engage and obtain access to management and supervisory board members. We need to create a road map so that German companies adhere to the same standards as those around the world. I don’t believe they want to be or need to be in-transparent but there is a learning curve.’

It’s not a question of attitude or ignorance, agreed Vonovia’s Thomas Zinnocker. ‘The listed real estate sector is young...it’s more a question of harmonization on governance topics, and roles and responsibilities. We have our own universe and an old culture, we now have to learn together. Management and supervisory board members cannot ignore the wishes of investors, they have to incorporate them in their businesses.’

Fragmented ownership
He added that the fragmented ownership structures of some listed companies may be an obstacle. ‘We can’t follow every investor’s needs. But in terms of disclosure and transparency, there is room for improvement.’

The trend is positive, added Op ‘t Veld. ‘There’s so much going on now, this area was underrepresented on the agenda in the past, but that is changing. The market circumstances are such that things will have to change. There will be some friction, but ultimately the discussion will lead to companies that are better run with higher valuations and happier people all round.’

According to Barkow, there is little excuse for not being the best in class on disclosure. ‘It’s good for the valuation of the company and the share price.’