Last September Philip Charls took over from Nick van Ommen, the inaugural CEO of the European Public Real Estate Association. Not enough time for him to have made his mark already, perhaps, but he is clear about his ambitions - and the challenges facing him, as he sets out to Martin Hurst
"The organisation I joined last year was in really good shape," Philip Charls says. "From EPRA's humble beginning with 25 members, my predecessor Nick van Ommen grew it to a very serious player. One of my tasks is to expand it further. I envisage further developments in the FTSE EPRA/NAREIT Index series, the convergence of company reporting, our lobbying efforts and the way we communicate to our members."
EPRA's members - which today number more than 200 - are Europe's leading property companies, investors and consultants that together have more than €300bn of real estate assets.
The association's membership continues to expand but Charls stresses: "The expansion is not only about members. Above all, expansion is about quality. We need to get new specialists on board to cater for the needs of a membership base that will become increasingly demanding. We now have the luxury - the money - to do this."
The main appointment was that of Gareth Lewis, who joined EPRA in June from the British Property Federation as director of finance, responsible for tax and reporting issues. "We are delighted to have Gareth on board," says Charls. "He has gathered a lot of experience of REITs, taxation and accounting issues, of lobbying and of building the framework for REESA. This has given him the trust of a lot of people, so his joining EPRA is a giant leap forward. We have further boosted this area by providing Gareth with an assistant who will handle the tax side."
EPRA is also looking for further expansion in the research department with the appointment of Dominic Turnbull "to make the research output more accessible to a wider audience," Charls explains. "He will also help us with the newsletter. We are also currently looking for a third research assistant to join Fraser Hughes."
EPRA will also expand its geographical footprint. "We will spend a lot of time exploring new markets," says Charls. "EPRA has a mission to help countries that don't have a REIT regime to establish one. We are pursuing this a little more aggressively now than in the past."
Some countries have presented challenges, and Finland is a good example of this. According to some EPRA members in Finland, the Finnish government has viewed REITs as state aid for the property sector. It asked why they should favour one sector of the economy over another. "In other words, it was a case of complete miscomprehension," says Charls.
"Now they limit REITs to residential property only but they are mixing up a budgetary issue with a social housing issue to create an investment vehicle and that doesn't make sense. The Finnish government clearly wants to encourage investment in the residential sector which is a sensible policy objective. However, by being overly restrictive, we believe they will ultimately restrict the capital flow into the residential sector and have the opposite effect to that intended. A more sensible approach would be to follow the example of other successful REIT regimes and allow Finnish REITs to invest in both commercial and residential property.
"If necessary, minimum conditions could be established to require all REITs to hold a proportion of their assets in residential, although this type of objective could equally be managed through planning regulations. The key point is that these regimes need to allow flexibility to be attractive to the key market players and investors. Otherwise they run the risk of never getting going.
"EPRA and RAKLI (The Finnish Association of Building Owners and Construction Clients) organised a one-day conference to discuss some of the issues facing the market. The Finnish market says the Finnish REIT structure should include office and retail and now European trade bodies are saying that too. The conference saw Gareth Lewis, Fraser Hughes and representatives from the French and German property industries address Finnish investors and the Finnish authorities about their own experience of introducing a REIT." Philip Charls chaired the event.
EPRA has also visited Russia. "We visited eight companies and came away with five new members," Charls says. "However, our view is that, if Russia wants to be seen as a serious destination for foreign capital, it must develop more transparent working practices and reporting. This is another opportunity for EPRA to help and with this in mind we have organised a meeting that will take place prior to the next EPRA conference in Stockholm, which will gather together the Russian members and a number of analysts and investors."
As Charls states in the March 2008 EPRA newsletter, the programme for this year is far-reaching. Reports will be published on NAV and sustainability. The full report on corporate governance will be published in July. The shortened version was featured in the last edition of IPE Real Estate.
On the subject of company reporting, the big issue continues to be the convergence of International Accounting Standards and US GAAP. "EPRA will work further towards ensuring that this convergence process continues without reducing the quality of financial reporting for the European real estate industry," says Charls. "We have identified with our members a number of areas where they would like us to be more active, such as performance reporting, lease accounting, financial statement presentation, revenue recognition and valuation. We have produced a brief on a number of these issues, which we have recently presented to the IASB."
One of the principal areas is financial reporting where there are significant differences between practices even within Europe. "Our goal is to improve the overall quality and transparency of financial reporting within Europe and increase uniformity within its various member states," Charls explains. "Given the globalisation of the economy and the inevitable convergence between financial reporting standards, there is a definite need for Europe to have a strong, coherent voice during a period when compromise will be inevitable on both sides of the Atlantic. There are clear benefits from harmonisation that arise to the global real estate industry, but accountants are not easy to steer as they tend to believe their own system is best, so the task may be very challenging."
Each year at its annual conference, EPRA presents an award for the most improved real estate company in terms of the quality of its reporting - the EPRA Best Annual Report Award. In addition, EPRA has done some work on the level of corporate governance in Europe. The corporate governance report shows some variation between countries - so are there lessons one country or region could learn from another? Is there a country or region that sets the standard?
"If you look at the countries there is quite a variance between the countries - but also within the countries," Charls says. "Within most countries the scale between the top and the bottom is very broad - in fact it's all over the place. So, without even knowing much about Asia and the US, you could say that the variation in the quality of reporting varies more by company than it does by country or region."
The introduction of the best practice recommendations for reporting in 2000 started slowly. But EPRA continued to put out the message and year after year published the recommendations. Gradually more and more companies took note and eventually started using the recommendations. "Now, seven years later, three-quarters of the European market uses the recommendations in one form or another," says Charls.
"Now companies look at the report's findings in terms of adhering to the recommendations. They also hope that using the recommendations will help them gain a shortlisting for an EPRA award in the future. So I think the award has gained credibility over time. There has been progress - although of course we would like to have seen more!"
One of the issues that has received attention in the UK is the pay of directors of listed real estate companies and how it is structured. Particular concern has been voiced about the fact that pay is based on the IPD index when in fact the company's share price may offer a more up-to-date reflection of performance. "Pay should be a function of both the property market and stock market. The property market will catch up in time anyway," says Charls. "Pay structures based on a combination of both would be appropriate."
EPRA plans to increase its lobbying activity covering reporting issues including lease accounting, deferred taxes, standardisation or reporting and fair value accounting. "At the beginning lobbying was done mainly by members who were good and kind enough to help EPRA out," says Charls. "My brief when I took over was to take this to the next level."
What does Charls mean by this? "Lobbying is a complex task even when undertaken by individual country representatives. Our challenge is to ensure that we are able to obtain a clear mandate from members as to what areas they want us to focus on, and to ensure that we obtain input on these issues from our very broad membership base.
But as Charls explains, EPRA has to tread carefully. "We represent 27 countries, the majority from Europe, but an increasing proportion are non-European. We have to be sure that, when we take a position, it is backed by our membership." He says. "We need to do this without duplicating the effort of individual representative bodies and really add value. This will require using the new resources we have at EPRA through our permanent staff to reach out and communicate more regularly with a broader membership base"
These principles apply in the case of the EU-REIT. "We will not join the EPF, which is lobbying for an all-out EU-REIT legislation, whatever that might be," says Charls. "Our members have said either through the association or individually that they don't want to go down that route because it might harm their interests. For example, the French don't want their REIT legislation - which is the most advanced in Europe - to be watered down by a Brussels vehicle."
Charls agrees that consideration of an EU-REIT is relevant if Europe is to become more competitive, but the real issues that can and should be addressed within a realistic timeframe is the specific barriers to cross-border investment within Europe and globally. Uncertainties in the market presented by the application of European Law and the fear of loss of tax revenues by individual governments on cross-border distributions are resulting in a less efficient REIT market in Europe as a whole.
However, he stresses that efforts must be undertaken in parallel with developments on a country-by-country basis. "In the long run, as cross-border investment continues, the regimes will tend to converge anyway. Our goal is to complement that process by encouraging mutual recognition of European REIT regimes " he says.
Sustainability is another issue that is gradually coming to the fore. In an interview withIPE Real Estate at the EPRA conference in Athens last September Charls described it as "a very sensitive issue for members," and added: "We have a social responsibility as an industry, although for EPRA to form a view on best practice on sustainability for the real estate industry would be a bridge too far at this stage."
So how will we see the issue move forward? "We are committed to moving this issue forward, but it is still early days and with so many initiatives taking place at a local country level, it makes little sense for us to wade in at this stage," he says. "We are conscious that the debate has moved beyond simply a question of the real estate industry doing the right thing and are currently monitoring developments closely. There will come a time when we will need to provide guidance to our members and take a role in encouraging transparency and establishing best practice."
The scope to work further with other industry associations is also on the agenda. Charls sees this as "definitely the way to go. Tax issues, indices, regulation - we have so much in common." REESA is a product of this goal.
*REESA, the Real Estate Securitisation Alliance consists of NAREIT (US), BPF (UK), REALPAC (Canada) PCA (Australia), APREA (Asia-Pacific), ARES (Japan) as well as EPRA