Article produced by Dominique Moerenhout, EPRA
Now that the endemic phase of COVID-19 seems within reach, the listed real estate industry has the right fundamentals to enter a new path of sustained growth.
With investors increasingly focusing on thematic investment, following trends such as an ageing demographic, urbanisation and omnichannel transformation, the industry’s growth is expected to be primarily driven by the new alternative sectors. This has been reflected in the outperformance of industrial, self-storage and residential since the beginning of the pandemic. Life-science, data centres and to a certain extent also cell towers are expected to gain in importance. There is a huge growth potential, as alternatives represent over 40% of the U.S. market cap, and only 12% of the European one. While there has been a limited number of IPOs in the last couple of years, it is mostly a consequence of the market’s uncertainty around the pandemic. More activity is expected this year, which will counterbalance the recent wave of M&As and the consolidation of the market.
Moreover, recent years have seen an increasing importance of generalist investors drawn into the sector because of stable, long-term returns and last year saw several foreign pension funds initiate or expand mandates focused on LRE. We expect this trend to continue, as both the number of institutional investors and their allocation to the listed sector is still too low to fully benefit from the LRE’s value added in a multi-asset portfolio. Pension funds allocate only 0.3%-1.7% on average to LRE in Europe, while this number is even lower for the Iberian market (0.2%-0.4%).
Another big global trend we are observing is ESG, with the “S” gaining in importance during the pandemic. For European LRE, ESG has been already central for over a decade, and we have recently seen a significant push from EPRA members to implement decarbonisation strategies across their portfolios. Central to this effort have been green bonds, with issuance between 2014 and end of 2021 reaching 33.5 billion euros, most immediately over- subscribed. This trend is also very much present in Spain, with Colonial recently announcing plans to requalify all of its outstanding bonds (4.6 billion euros) into green bonds.
Going forward, inflation and interest rates will continue to be an important topic. The current inflationary pressure however is likely to be temporary and its short-term impact should represent a positive driver for the listed real estate industry in Europe. There is evidence of a strong and positive correlation between corporate profits and inflation as well as shareholders’ returns and inflation. At the same time, rental practices in Europe facilitate the integration of inflation dynamics into the companies’ revenues and support rental growth. Strategies put in place since the GFC, most notably restructuring of debt, has allowed listed property companies to be extremely resilient during the pandemic and prepare them for a potential hike in interest rates.
Overall, the European LRE sector is well positioned to continue its recovery post-pandemic and to address the new challenges and opportunities which lie ahead.
On the 28th of March, the IV Iberian REIT & Listed Conference will gather a panel of real estate experts that will provide valuable insights on all these matters, specifically addressing how the listed real estate industry is expected to evolve, how ESG will mark the future growth of the sector, and how inflation pressure may induce to the adoption of new strategies .
Join Iberian Property & EPRA in a unique event, impossible to miss!
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