Looming Market Glut May Remake European Property Management

Like an approaching storm front, a looming market glut promises to shake up the European real estate management landscape. Already, a broad range of continental firms is shedding real estate to concentrate on core businesses. And heated competition is sparking a Europe-wide binge of restructuring and consolidations that promise to dump a mountain of property onto the market.

That expected bricks-and-mortar avalanche presents both opportunities and challenges for the continent’s ragtag community of corporate real estate securities firms.
Most importantly, as U.S. investors’ tide of capital begins arriving on European shores, the continent’s publicly quoted real estate firms may well have to clean up their acts to attract Yankee dollars. In fact, a group of investors, banks and users has launched the European Public Real Estate Assn. (www.epra.com) to meet the horde.

Analysts: Size, Liquidity to Infiltrate European Market

But managing property in Europe may never be the same, industry analysts say.
Says Jon Zehner, a JP Morgan & Co. managing director, “You’re looking at 30 to 40 billion Euro (US$26.6 billion to $35.5 billion) of real estate that is going to be disposed of across Europe in the next two to four years. This is a huge piece of the current market, and the only source of capital to absorb that are the publicly listed companies.”

Adds Patrick Sumner, divisional director of European property at Henderson Investors, “The quoted real estate securities sector in Europe will have to double in size in the next five years if we’re going to handle this flood. This does not mean twice the number of companies, but rather the same number of firms at twice their current size and spread evenly across the continent.

“U.S. investors need size and liquidity to function as they do across the Atlantic,” Sumner continues. “Companies now in the sector will have to grow organically, and some will have to come in from outside. That’s the wave of the future in European property.”

“We are going to see the emergence of some pan-European firms, proving that it doesn’t matter where they are based,” concurs Alvaro Portela of Portugal’s Sonae Immobiliaria. “What is important is a firm’s performance and the quality of its management.”

All Players May Profit

All industry players will profit from the changes triggered by Europe’s property flood, contends Mats Cederholm, CEO of Diligentia AB. “A larger market means more flexibility, more liquidity and economies of scale as in other sectors,” he says. “This will benefit everybody from investors to clients and users.”

Investors and users, for example, may feel that indirect ownership, with securities firms managing assets, may also have advantages over direct ownership as a cash haven, say some industry analysts.

Comments Henderson’s Sumner, “As an equity fund manager, I want an alternative to direct investment in real estate, which has not been a great success in the past, and publicly listed companies are the clear route.

“If you want to get broad diversification around the world through direct investment, you need hundreds of millions of dollars,” Sumner adds. “Security shares give you access to the best management and a broad mix of risk at a minimum commitment.”

Adds Zehner, “Every single property company doesn’t have to be pan-European. I think you’re going to see a broad mix of local and continent-wide firms, with more and more pan-European companies as advisors.”

Some see the Euro zone market’s size providing critical mass for both local operating expertise and broad exposure.

Says Zehner, “In the old days, the answer was to specialize in local markets. Well, I believe size will allow you to have it both ways. We found in the U.S. that the benefit of size meant you could have local sharpshooters in both Los Angeles and in Washington if you had the right management organization.”

European Housecleaning Ahead?

European securities firms, however, may have to clean house to meet U.S. disclosure standards in order to attract the flood of U.S. capital seeking a European haven.

Says Zehner, “In the U.S., we have strict standards of disclosure about operating performance and balance sheets. A well-established investor network obliges public real estate firms to report consistently and transparently. And all the U.S. firms have the same tax structure. In Europe there is no standard valuation methodology. Disclosure differs widely from country to country both on operating performance and on balance-sheet information.

“Without meaning to cast any aspersions, the attention span of equity investors is at the level of my seven-year-old,” Zehner continues. “They have no time to ferret out the differences in corporate structure and tax environments of the various European real estate securities companies. So if the real estate securities firms are going to attract this broader base of capital, we are going to have to make it easier for investors to make a critical evaluation.”
Says Sumner, “The first problem for investors is the quality of information on returns from direct property markets. There are very few indices in Europe that have long-term historic value on which to base the historic monetary returns.”

Adds Zehner, “Disclosure requirements, regulatory environments and the transparency of balance sheets differ so widely from country to country that it is extremely difficult to determine the good performers. It’s a pretty confusing picture, even for real estate professionals.”

Germany Moving to ‘Anglo-Saxon Model’

Some see institutional investors’ increased activity providing the change catalyst. And they see the German market as a microcosm of Europe’s problems.

Says Henderson’s Sumner, “The German market is the largest in terms of economic wealth, but one of the smallest in terms of publicly listed companies. And there is a lot of German property that needs to be recycled. Some of it will be absorbed by the publicly listed real estate firms, but Germany is not yet an equity culture or the home of pension funds of the kind you find in Holland, the UK and Switzerland. Before there is any real progress, there will have to be a better dialogue between the publicly listed real estate companies and the institutions that want to invest in them.

“Already,” notes Sumner, “a handful of German real estate companies are moving to adopt the Anglo-Saxon model, which has become the standard because they realize that this is the way forward.”