To be sure, we could have said almost the same thing in 2012 or 2009 (aside from the “securities” part). However, for investors who can’t hold “bricks and mortar” in a portfolio, or who prefer the liquidity of listed exposure, that suggestion would have been essentially useless. Today, after major advances in Europe’s listed real estate market, things are very different. For the first time, having a genuinely global listed real estate portfolio—as opposed to a U.S. and/or U.K. one with a “global” label on it—is a realistic prospect.
Let’s be clear: We continue to believe there are compelling opportunities in the North American REIT market, which has a dividend yield of 4.1% (as of August 31, 2015). In our view, select areas in Asia look attractive, too. And within Europe, currently we would also caution against being underweight the U.K., where real estate fundamentals remain strong, and where we are seeing a number of quality companies (with mixed-use assets in iconic locations and demonstrated management strategies) that we believe are attractive for listed real estate portfolios throughout an economic cycle.
Nonetheless, we believe the U.K. real estate cycle as a whole should moderate in mid-2016, with the listed market’s prices anticipating this trend some months before, despite continued rental growth. In contrast, Continental European valuations have a lot of catching up to do and, in contrast to the U.S. and the U.K., seem unlikely at this stage to see any headwinds from imminent monetary policy tightening. While the FTSE EPRA/NAREIT U.K. Index provided a dividend yield of just 2.6% at the end of August, the Developed Europe ex-U.K. Index yielded 3.4%.
What makes this especially noteworthy, however, is the nature of the opportunity in this cycle compared with previous ones.
A World Transformed
One reason I joined Neuberger Berman as a manager of European listed real estate was that I was so excited about the growth I was seeing in those markets.
At my previous shop, I worked alongside colleagues investing in bricks and mortar, and in 2012 it was an exquisite frustration to hear them rhapsodize about the low valuations in Dublin and Madrid offices—where we on the listed side had no companies to invest in.
Of course, there was plenty to do in the U.K., and Unibail Rodamco in France is one of the largest pan-European real estate investors. But apart from that, Europe as a whole was a bit of a non-starter.
That world is almost unrecognizable now. The value opportunity in Continental European bricks and mortar three or four years ago led to demand for more listed opportunities, which in turn spurred a wave of IPOs.
Since 2013, there have been 45 European real estate company IPOs, worth a total of more than €13 billion. Twenty-eight of those, representing an IPO value of €10 billion, were Continental European listings. Of the 16 €300 million-plus IPOs over that time, seven were seen in Spain and Ireland, including Merlin Properties, which now owns more than 900 commercial real estate assets on the Iberian peninsula, worth €3.4 billion.
The effect of these listings can be seen by looking at the EMEA ex-U.K. constituents from the FTSE EPRA/NAREIT Developed Index. As of the end of August, they account for 11% of that index and their market capitalization has doubled since the beginning of 2012, from €69.3 billion to €141.5 billion. Moreover, the regional composition of this group has changed markedly: France, which had been 45%, is just 23%; Germany has gone from 10% to 22%; the Netherlands has gone from 9% to 19%; Spain is up from less than 1% to 4%; and Ireland, which was not part of the Developed Index at all until March this year, represents 0.7% and almost €1 billion of market cap.
We don’t anticipate that 2016 will be a value opportunity like 2009 or 2012. Most of the low-hanging fruit had already been picked before this wave of new IPOs. Nonetheless, Ireland and Spain are still very interesting to us, and the cycle for Continental European commercial real estate has lagged the U.S. and U.K. cycles significantly. For the first time, listed real estate investors can position themselves for the evolution in these cycles—and we believe they may want to consider doing so soon.
Opinion by Gillian Tiltman | Portfolio Manager, U.K. and Continental European Real Estate – Real Estate Securities Group –Neuberger Berman