PIE Expert Views

EXPERT VIEW   Listed real estate back at the top of its game By Philip Charls, Chief Executive Officer, European Public Real Estate Association (EPRA), Brussels

The listed real estate sector has much to be proud about - emerging from recent hardships in fine shape. The pressures of the downturn have squarely shone a light on the positive characteristics of this sector: timely valuations, market scrutiny and analysis, prime assets in prime locations managed by specialist teams to name but a few. The requirements of transparency and quality of management within quoted property companies, and attractive long-term net returns to investors have established the listed vehicle in Europe as a solid home for investor funds. The listed sector is at the top of its game.
By its nature there's nowhere to hide. Investors trade listed company stock on their reputations as well as their balance sheets. Every day the sector is challenged, valued and analysed – companies are held to account by the markets. And the markets appear to like what they see. While other vehicles can be seen as opaque - at best, coupled with ineffective valuation models, the listed sector is a relative picture of health. It currently enjoys good access to capital with over €15bn raised in the last 12 months alone in equity and bond markets. Recent bond market activities indicate that the demand is consistently out there, and the market is willing to lend to well-structured, well-managed listed companies. One only needs to point to Unibail-Rodamco's February bond call, raising over €750bn at an incredibly favourable 2.37% rate to realise there is investor appetite for a safe pair of hands.
And while the sector indeed offers relative long-term safety, it's fair to say that it still manages to consistently hand in attractive long-term performance returns versus other asset classes. Investors can achieve both portfolio diversification and the same, or superior, performance, by investing in listed real estate as they can in the underlying bricks and mortar, but in a more transparent, liquid, and cost effective way.
Listed real estate companies rest on strong, steady cash-flows. With their longer-term stable income-producing assets, they make a perfect fit for pension funds. Increasingly, research suggests that pension funds should manage their investments in listed real estate as part of the overall real estate allocation rather than as part of the equities allocation in their multi-asset portfolios, as this is clearly where they belong. Pension funds worldwide are on average getting poorer performance, higher costs, less transparency and liquidity by investing directly in bricks and mortar or using fund of funds and they ignore listed real estate or REITs to their detriment according to a report issued by Maastricht University. Indeed, they have been potentially losing hundreds of millions of euros in returns for their members by not choosing the most transparent, cost effective, liquid and best-performing property investment over the long term.
So how significant is the cost consideration when balancing investment choice? Clearly, cost over the long term should feature ever more strongly in any call on relative performance. Once again, the overall transaction cost of directing funds into the listed sector are low relative to the time/people required to conclude a direct investment - and you get one building versus exposure to €250bn of quality European assets by following the FTSE EPRA Europe Index. The Maastricht report found that the average cost, globally, of pension funds investing in real estate is 76bp; but more than double for direct real estate (83bp) than for REITs (41bp). Overall real estate investing carries significantly lower costs than private equity or hedge funds.
The fundamentals are what set the listed sector apart. When you combine the level of analyst scrutiny and transparency, the timely and bountiful data available on company and asset performance and the advantages brought by the liquidity of public markets, it's no wonder we look to 2013 with confidence. EPRA will continue to represent its members to ensure the success story, which is being written every day by top-quality listed property companies run by dedicated real estate specialists, is read by investors who are not benefitting from exposure to this asset class. pc