Listed real estate index set to double on specialty sectors

It seems like only recently when Germany was a laggard in the European listed real estate sector, and we here at REFIRE have no difficulty remembering the plaintive wailing of the EPRA leadership at the slow pace of growth of listed German property companies. Then, UK and French companies dominated the European Public Real Estate Association EPRA’s European index, and even the Netherlands had a weightier listed sector than its German neighbour.

Over the last five years this has all changed, completely.

EPRA announced at its recent annual gathering in Berlin, attended by REFIRE, that Germany’s listed real estate industry has overtaken the UK for the first time as largest market in the FTSE EPRA/NAREIT Developed Europe index.

Largely driven by growth in the residential property market, Germany has recently raised its share to represent 27.54% of the index, pipping by a narrow margin the UK which now accounts for a 26.65% share. The Netherlands follows at 12.76% and France at 9.18%.

The index, covering companies with a total market capitalisation of around €250bn, currently includes German listed residential firms such as Vonovia, Deutsche Wohnen and LEG Immobilien among its top 10 constituents, according to EPRA.

EPRA also announced strong growth in speciality property sectors, such as logistics, industrials, healthcare and hospitality at the annual gathering. According to research from Amsterdam-based bank and investment manager Kempen,these real estate segments are set to propel a substantial increase in the market value of Europe’s listed real estate sector over the next five years, with the market capitalisation of the Developed Europe index expected to double to €500bn by the end of 2022.

Dick Boer, head of real estate at Kempen’s corporate finance unit, said: “Even based on very conservative assumptions, Kempen believes that we could easily see a doubling in the size of the market benchmark index within five years.”

He said the European speciality real estate sectors — also including hospitality, healthcare and self-storage — were growing at a much faster pace than traditional listed markets such as offices and retail. This was because the speciality sectors “represented a way to access some of the best real assets behind the great secular investment themes of our time, including ageing demographics and e-commerce”, he said.

Drawing parallels with North America, Boer said that in the USA alternative sectors already represented about 40% of the REIT market, compared with 10% in Europe. If the European companies grew to match the market share of US peers, this would add 50% to the size of the European index, he said.

Boer said that, along with German residential, specialty property firms are generally valued at a premium to the net asset value (NAV) of their underlying holdings, which allows them to raise capital to buy new assets and is a growth catalyst for equity listings.“Even if we get rising interest rates, that is not going to affect expanding areas like e-commerce, or the need for healthcare accommodation based on ageing demographics, and will probably indicate solid economic growth, which is only positive for real estate,” he said.

Boer said he was confident that real estate companies focused on logistics, healthcare and self-storage would be seeking stock market listings, with accompanying “sizeable liquid opportunities” for institutional investors. “European listed real estate offers a rock-solid growth profile if you look at the market’s fundamentals and cash flow,” he concluded.