Joke Emmerechts/EPRA
EPRA 2015 - Berlin
Ten years in which German residential has gone only upwards, creating huge shareholder wealth along the way. This week EPRA figures show that Germany overtook the UK as Europe's largest listed real estate market by value, as measured in dollars, during the first quarter, due to a marked outperfomance of German real estate stocks.
We've come a long way in Germany over the last five years in recognising the role the capital markets play in raising capital for, and refinancing, real estate investment. The industry has matured, and the range and variety of financing sources has broadened beyond measure for German and international companies looking to expand their investments in Germany.
Nonetheless the battle-cry going up every year at the annual EPRA conference has been to rally the German troops to cast aside their traditional aversion to the stock market and get worm to the notion that publicly-listed vehicles are both a source of owner-friendly and transparent capital-raising, and an asset category that other investors would like to include in their portfolios.
One of the key themes at the recent EPRA gathering in Berlin in September was the obstacles – perceived or otherwise – that hinder German pension funds from gaining more exposure to the listed real estate sector.
Philip Charles, EPRA's feisty CEO, told delegates at the conference that only a change in the laws will encourage German institutional capital to invest in the listed sector. Pension funds and other institutionals "were missing out on higher returns by virtually excluding real estate stocks", he said. EPRA will continue its drive to push for more pension fund investment in the sector, he promised attendees.
Charles may have singled out the German pension fund industry's aversion to the listed sector in favour of fixed income instruments as a national bugbear, but all in all, as he conceded, Germany has made great strides in raising the profile of its listed sector. Five years ago Germany was an also-ran, but this year has overtaken the Netherlands in the European size rankings of its listed sector, behind only the UK.
By mid-August the market cap of German listed property companies was €48bn, up 73% on last year and just shy of its all-time high of €50bn before the recent stock market downturn. Gross property assets held by the listed sector grew 17%, from €66bn to €78bn.
However, what surprises many is the fact that 95% of German listed property stocks are owned by foreigners.
Although very strongly weighted towards the residential sector (now accounting for 88% of Europe's listed residential property), the share prices of German firms have outperformed their European peers, with EPRA Germany rising 31% over the last 12 months compared to 19% for its UK peers. Equity raised on the capital markets this year has already surpassed the total of last year's level, which was itself a record.
One man who attempted to quantify what role a greater exposure to the listed sector could play for pension funds was Alex Moss, the CEO of London-based Consilia Capital and a member of EPRA's research committee. Moss has conducted research into the performance implications for investors who combine an unlisted real estate portfolio (in this case German Spezialfonds) with a global listed real estate element, in what he calls a 'blended 'approach to real estate allocations.
Moss presented his paper at the EPRA conference, and claimed there were "quantifiable benefits" to blending a multi-asset portfolio with a listed real estate element.
His study concluded that a 70-30 split between property Spezialfonds (the preferred real estate vehicle for German pension funds) and listed real estate over 10 years (2004-2015) would have produced annual returns of 5.4%, as against a return of only 2.9% using only the fund vehicle. The results show a dramatic improvement in performance, said Moss, "with only a limited rise in volatility or risk".
The study also found that implementing a ‘trend following’ equities trading strategy, based on a 10-month moving average, increased the blended portfolio’s performance to 6.94%, with a smaller increase in volatility to 3.45%.
Moss's study further examined the impact of adjusting the real estate element in a typical German pension fund made up of 65% bonds, 7% domestic equities, 7% international equities, 9% real estate and 11% alternative investments. Increasing the listed element of the real estate allocation and applying ‘trend following’ boosted the overall portfolio performance from 7.66% to 8.28%.
Additionally, concluded Moss, "the further benefits of investing in real estate equities, such as improved liquidity, the scope for strategic property-sector diversification and yield enhancement, are not reflected in these figures.”
Also speaking to delegates in a panel discussion on German pensions was Anna Weickart, a senior investment consultant and research manager at human resources consultancy Towers Watson in Frankfurt. She highlighted German reluctance in recognising the role listed real estate can play in boosting returns, attributing it to a lack of market understanding, an aversion to volatility and the negative experience of the German REIT movement as factors preventing more exposure to the sector.
Ms. Weickart said that in a recent survey carried out by her company of German pension funds responsible for nearly €120bn in investments, only one survey respondent had any exposure at all to listed real estate. “Global real estate security investing is a quick and efficient way to get a well-diversified exposure to some unique property assets and top management teams, using only a small amount of capital and low governance needs. They are increasingly being incorporated by investors as a separate asset class in their strategic asset allocation decisions", she said.
"German investors do not appear to have yet recognised this and it is important all market stakeholders, including industry associations such as EPRA, asset managers, consultants, institutional investors, politicians and regulatory bodies, work together to rectify this education gap.”
Ms. Weickart said the recent inclusion of Vonovia (ex-Deutsche Annington) in the DAX-30 index of Germany's top companies may act as a catalyst for further local institutional investment in listed property stocks.
She conceded that until recently, regulatory restrictions may have prevented German institutional investors from investing in listed real estate stocks. Historically they have favoured open-ended real estate funds or Spezialfonds. But with a large number of these funds now in the process of being wound down, ‘That may also be a trigger for more exposure to securities,’ she said.
Still, change will be slow in coming, suggested Edgar Kresin, the head of treasury at the ministry of finance in the eastern state of Sachsen-Anhalt. German pension funds' preference for fixed-income is deep-seated, and any move into securities would be at a regional level before he could persuade his management to invest globally, he said.
Kresin and fellow-speaker Wilfried Braun, head of section portfolios at the Deutsche Bundesbank, both pointed out that German institutionals do actually have exposure to real estate through their investment in covered bonds or Pfandbriefe, although these have the chaacteristics of fixed income. "They do of course offer very limited returns compared to investment funds, REITs of private equity", said Braun.
Kresin said that the ongoing low yields on fixed income instruments was having a slow drip-drip effect on attitudes towards real estate, both as an investor and as an owner. Many states and federal government authorities do have considerable exposure to real estate in the form of social housing, administration offices, forestry and agriculture, so this is not new for them. "What is new is to have it as an asset class that is actively managed."
