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Surge in real estate securities funds reflects growing appetite for listed property exposure, EPRA study shows

The_use_of_listed_RE_securities_in_asset_management.JPGBrussels, April 09 – Demand for real estate securities has surged since the global financial crisis as a property allocation gained through the listed sector plus the attractive income returns appeal to a broader range of investors, according to a study released today by the European Public Real Estate Association (EPRA).

Assets under management of real estate securities funds grew 68% to USD 250 billion from 2007 to 2012, according to research by consultancy company Consilia Capital and Property Funds Research for EPRA. It estimates that the number of real estate securities funds increased 39% to 677 in the same period. The most recent figures show that total assets under management for Exchange Traded Funds (ETFs) pegged to FTSE EPRA/NAREIT real estate indices jumped 85% to USD 8.7 billion in the 12 months through to February this year.

Philip Charls, Chief Executive of EPRA, said: “Above average dividend yields and secure long-term cashflows generated by listed real estate companies have an immediate appeal to yield-hungry investors. The liquidity, efficient pricing and transparency offered by the listed property sector mean it is also attracting a broader range of investors from defined contribution pension plans to long/short hedge funds.”

The tax efficiencies of the real estate investment trust regime means that global REIT funds now account for seven of the ten largest global real estate funds, with USD 22.2 billion of assets under management as of the end of 2012, Consilia’s report showed.

Asset managers have digested academic research showing that over the longer term the listed real estate sector delivers returns comparable to those generated by directly owned buildings. Researchers have supplied evidence to convince more investors that having listed real estate in a portfolio can also improve returns and diversify risk.

The report highlights how diverse investment strategies using real estate securities have brought depth and increased liquidity to the market. Beyond the large group of income return-focused investors, the broader and growing uses of the listed sector can be categorized into the following investment strategies:

  • Long/short strategies: Returning to favour among traditional long only specialist asset managers as well as new hedge fund entrants to the market. This approach first came to prominence in 2006/7 but foundered in the global financial crisis.  
  • Listed real estate securities as a proxy for real estate investment: Recent institutional investor mandate awards, including one from the National Council for Social Security Fund of China, target global REITs as a liquid, tax-efficient proxy for the global real estate market.
  • Platform investing: this allocation to sector-specialist real estate asset managers was traditionally the preserve of the private market. Specialist management teams with unique assets mean this approach can also apply using listed real estate. Forum Partners has executed this strategy globally, with over 70 investments in 17 countries. Platform investing can be used to build blended listed and non-listed institutional portfolios, incorporating the most attractive assets from both sectors – an investment strategy developed by the largest Dutch pension funds.
  • Listed real estate is potentially a key component of new Defined Contribution pension strategies in the UK. Auto-enrolment into Defined Contribution pension schemes in the UK is now underway and one of the biggest challenges facing the industry is how to provide a suitable real estate platform for DC schemes as has been successfully pioneered in the US. Legal & General has provided one UK solution, by combining their managed property funds with a Global REITs Index Tracker Fund.
  • Demand is increasing for real asset (or inflation protection) funds, which include listed real estate. For example Cohen & Steers Real Asset Fund holds 25%-30% in global real estate, 25%-30% in commodities, 15%-25% in global natural resource equities and up to 20% in other assets such as gold.


Download full report: The use of listed Real Estate securities in asset management. Or browse other research summaries in the Compendium on the right.

For more information, contact Ali Zaidi: a.zaidi@epra.com

•    The experiences of markets such as France, the Netherlands and Australia demonstrate that a stronger listed property sector would be beneficial for Germany.
•    The benefits include: job creation; greater investment in urban centres and energy efficiency; more transparency; lower investment costs; strong dividend flows for pensions.
•    International comparisons show Germany should allow the conversion of
EUR 20 billion frozen in open-ended property fund assets into listed entities to reap the economic benefits.
•    CEO of EPRA: “An historical window of opportunity for Germany.”

Brussels, November 06, 2012 – The political debate in Germany over the future of open-ended property funds has focused a spotlight on the fundamental structure of the underlying real estate investment market. Germany differs markedly from nearly every other major economy worldwide due to the absence of a large listed real estate sector.

The experience of other countries suggests that the economy is therefore only benefitting to a limited extent from the strong investment flows and professional services these listed companies can bring to the urban landscape, the European Public Real Estate Association (EPRA) argues.

Philip Charls, CEO of EPRA said: “Germany has by far the smallest listed real estate sector of any major economy globally, due to historical structural obstacles to the market’s growth. Yet you only have to look across the border to France to see what can be achieved in terms of more jobs and investment in less than ten years, if these companies are provided with the right conditions to thrive. The strong long-term dividend flows listed property firms generate are also a good match for pension fund liabilities and so can form an important and reliable part of retirement income in old age.”

The German situation
In contrast to other major economies, real estate investment in Germany has focused on the open-ended property fund model, largely distributed by local banks, for over 50 years.

Economy State Secretary Bernhard Heitzer told a recent conference of the RDM Association of Property Professionals and Caretakers (Ring Deutscher Makler) that the government had decided to retract a proposal to prohibit the creation of further open-ended property funds after the industry complained that this could cut many small investors out of the property market. Whilst this is true, it is also the lack of a large developed listed real estate sector in Germany, bringing with it the transparency, liquidity, and lower costs that real estate stocks offer, that has curtailed investors’ options.

EPRA believes that the time is now right in the evolution of the German market for the expansion of the listed sector to bring the significant economic benefits of these companies to Germany, in a similar way to the role they play in every other major developed country worldwide. 

Investing in property stocks is subject to minimal fees compared with the multi-layered costs, including up-front, share and property transaction fees, of many open-ended funds. A study carried out by the University of Regensburg in 2011 also showed that the average annual return of eurozone property stocks has been 7.2% since 1989, compared with 5% for the open-ended funds.

Listed German property companies have raised just under €3.0 billion in equity since 2007, from both domestic and international investors, and this capital has flowed almost exclusively into Germany supporting local economies and creating jobs. In contrast, the open-ended property funds have a far smaller proportion of their invested assets in Germany (around 35%).

At a time when the building stock of German cities requires intense investment to allow the country to meet its energy sustainability targets, the listed sector can act as an efficient conduit to channel capital into the renovation of houses, offices, and retail premises and support the adoption of new environmental technologies.

Olivier Elamine, EPRA Board Member and CEO of German listed real estate company alstria Office REIT-AG said: “There is around EUR 20 billion sitting frozen in open-ended property funds which could be put to work in the German economy should the government offer their investors the option of converting these assets into listed property companies. This opportunity should be seized, not only to safeguard existing investors’ interests, but as a potential catalyst for kick-starting a large dynamic publicly quoted property sector at the same time as giving a boost to the economy and helping small investors, pension funds and insurers.”  

The French listed real estate success story
The rapid growth of the stock exchange listed real estate sector in France, which has created strong jobs growth, high investment in French cities and solid tax revenues, could be replicated in Germany with the right market conditions and government policies.

A recent study by consultants PwC on the socioeconomic impact of the listed French REIT sector (or SIICs in French), which was established in France in 2003, concluded that the business activities of these real estate companies had strong positive benefits for the economy.

PwC calculated that through their large-scale real estate development, operating, and investment activities, REITs generated over 66,000 jobs in France in 2011 alone. The study estimated that these companies would invest a further EUR 17 billion over the next five years, generating more than 140 million working hours in the construction/public works sector (the equivalent of 88,000 full-time workers per year) and around 34,000 jobs in the retail sector.

PwC said the REIT structure was also a “winning regime” for the French treasury with the total tax paid by the companies – and their investors on dividends, totalling EUR 552 million in 2010. The corresponding tax take calculated using the standard rate of corporate income tax in France of 34.43%, would be EUR 190 million.

The French REIT sector with a total of 35 companies and a market capitalisation of EUR 46 billion is, however, more than four times larger than the German listed real estate industry at 16 firms and a market capitalisation of EUR 11 billion. France’s property stocks have been the biggest growth success story on the French stock exchange in the last ten years.

Other International historical comparisons with Germany
A study commissioned by the Bundesbank a few years ago and entitled: “Open-end real estate funds in Germany – Genesis and crisis,” drew an historical comparison between the situation in Germany and the development of dynamic domestic listed real estate sectors in Australia and the Netherlands after their open-ended property funds were threatened with collapse, following large withdrawals of cash by investors.

The roots of the Australian and Dutch open-ended funds crises were similar to the German situation and due to a fundamental mismatch between the liquidity of the funds’ structures – with investors able to quickly and easily withdraw their money – and the illiquidity of the underlying property assets, which can often take many months to sell.

In the early 1990s, the Australian government stopped redemptions in its open-ended property funds for 12 months after huge withdrawals by investors, forcing the funds to list on the stock exchange as an exit route from the situation. The number of listed property companies subsequently increased from 11 to 47 between 1993 and 1999 and market capitalisation from AUD 5 billion to AUD 30 billion, providing a vital source of dividend income to Australia’s compulsory contribution pension fund system. Today, the Australian real estate market is ranked as the third most transparent globally compared with Germany in 12th position.

Around the same time as the developments in Australia, a similar situation occurred in the Dutch market when the open-ended listed Rodamco fund froze redemptions due to heavy capital outflows. After a large injection of capital from a major Dutch pension fund, the company was able to resume its investment activities, later splitting into four listed entities and it 'lives on' today as part of Europe’s largest and most successful public property company – Unibail-Rodamco.

Philip Charls, CEO of EPRA, concluded: “A number of upcoming property IPOs in Germany itself, or of private firms holding significant German real estate assets, suggest that market conditions are moving the right way for the listed sector. There is now an historic window of opportunity opening up for Germany to match its international competitors by supporting the growth of German listed property companies and provide a boost to its economy at the same time.”

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EPRA Research Compendium