The listed real estate is set to outperform the other asset classes

The main leaders of the real estate sector have met on the 6th of February, where they have analysed the last decade of the REIT regime in Spain. Over the course of 2023, challenges like rising interest rates and geopolitical conflicts were factors of instability, still experts have sustained that the listed real estate sector has started already its recovery route and is in optimal conditions to face the coming years.

More than three hundred managers and professionals attended the sixth edition of the Iberian REIT & Listed Conference, which has already established itself as one of the most important meetings for the real estate sector in Spain and Portugal. Once again, Iberian Property joined forces with EPRA to organise this conference, which took place in the distinguished Rosewood Villa Magna hotel in Madrid, counting with the support of Aedas Homes, BNP Paribas Real Estate, Clifford Chance, Colonial, Lar España, Merlin Properties, and Morais Leitão.

The first presentation of the morning was given by Dominique Moerenhout, CEO of the European Public Real Estate Association (EPRA), who began by remarking that in 2024 we celebrate the 10th anniversary of the first listing operations in Spain, and that the SOCIMIs (Spanish REIT model) are a clear European example other countries should aspire to follow.

Making use of the old fashion way to quiz participants, more than half of the audience raised their hand to show they are more optimistic today that one year ago. On Dominique’s view we have reasons to be “cautiously optimistic”, because even though real estate investment volume decreased across Europe, listed real estate had an overall return of +17% during 2023, while the private real estate registered a -10% return. He recalled that «in 2022 the discrepancy was the other way around with listed accounting for a negative 37% return, and private a -4%».

The CEO of the EPRA, has also argued that valuations will be a key factor for the coming months, and he believes once the low economic growth is left behind, listed real estate will outperform the other assets classes.

Still on the economic context, Dominique highlighted that the listed sector is well prepared for high interest rates, and proof of that is 85% of the total debt in European listed companies is set at fixed rates, and around 38% of the debt issued by these property companies will mature between 2026 and 2028, therefore most companies should be able to roll-over bonds at lower interest cost than current levels.

One thing seems to be consensual for the future of the sector, certainty and cheap capital will be rare commodities, but opportunities are more evident than some might think. The current European share prices are a good example of it, with listed real estate companies trading with an average NAV (Net Asset Value) discount of 28%, a figure that is decreasing if we consider 6 months ago was at 45%, but which still demonstrates an important disconnect between share prices and operational performance.

«Diversification is essential for investors, but the inflation-hedge opportunity in real estate has never been clearer, and the earnings and rental growth figures of the listed sector make a compelling “portfolio repositioning” opportunity for investors», Dominique Moerenhout concluded.

In the same line, Luigi Speranza, Global Head Markets 360º and Chief Economist at BNP Paribas, confessed that if 2 years ago we would have been told China would enter an economic slowdown period, and that we would have 2 armed conflicts in Europe and the Middle East, most likely we would have agreed that today we would be in a recession…but it is not the case. So why not?

Luigi Speranza explained that the supportive fiscal policy and the good savings ratecontributed for the economic stability, and surprisingly the labour market remained tight compared to past standards.

On a relaxed note, the Chief economist stated that his outlook aligns with his surname (Speranza meaning hope in English). Eurozone inflation measures are on path to allow wage growth and therefore to fill in the gap created in the last two years, so this means real income growth as well, which ultimately is good news for consumption.

Optimism seems to prevail, nevertheless Luigi Speranza alerted the audience for some possible risks. First, shipping cost indexes relation to geopolitical tensions might pose a risk of supply-driven inflation re-igniting. Secondly, labour has been pointed out in the Eurozone as a key factor limiting production.

«Looking ahead, we think Spain still benefits from at least two relative advantages compared to core economies: 1- continued disbursement of NGEU funds; 2- and a higher reliance on services exports which have so far relatively unaffected by the weak manufacturing cycle and monetary policy tightening», he concluded.

The first panel discussion, moderated by Borja Ortega, CEO of BNP Paribas Real Estate Spain, included Miguel Pereda, vice-chairman of Lar España and chairman of Grupo Lar; Ismael Clemente, CEO of MERLIN Properties; Pere Viñolas, CEO of Colonial; and David Martínez, CEO of AEDAS Homes.

For Pere Viñolas, CEO of Colonial, the letting activity and occupation are at outstanding levels and rents have been increasing. He defended that Colonial’s performance presents a contrast with the pessimistic market view on offices. «We have 4 years of data evidence in our portfolio showing offices continue to make sense, there is demand and we have quality assets in Spanish cities like Madrid, but also in other big cities such as Paris where we are also doing very well».

Pere Viñolas informed that repricing and revaluation is where the sector is taking the beat, but he remains confident and believes that “the harder the shock, the better”.

Surprised on the positive side, Ismael Clemente, CEO of MERLIN Properties, also confirms the really good year on performance for Spanish SOCIMIs. In his view, the challenge on valuations creates lack of understanding, resulting in the NAV share price discrepancy, despite the share price having performed quite well in the last year.

The CEO main concerns for 2024 are long-term effects of productivity, shrinking margins and possible rents correction, besides slowdown in private consumption. In what respects to Merlin’s activity, the company is undergoing a very significant CAPEX program, and making an additional effort to enter a new segment (Data Centres), so obtaining capital in the most efficient way will also be a priority.

On the residential side, David Martínez, CEO of AEDAS Homes, stated the company is on track for a record fiscal year, with revenues surpassing 1 billion euros. The sector is at very good shape, and the imbalance of supply-demand remains contributes to a good expectation. Construction permits and land scarcity were the only risks pointed out.

Digging into the different types of living sectors, David Martínez argued that demand for BTR is “basically infinite”, but because the projects are highly leveraged investment transactions were not so frequent. As for the so-called Flex Living, the CEO sees it as a good opportunity for people looking to change their lifestyle, but he admits the depth of this demand is still not clear. The public administration initiatives for affordable housing are for sure something to look at as a positive factor.

Completing the roundtable of optimists, Miguel Pereda, vice-chairman of Lar España and chairman of Grupo Lar, announced that the retail sector did very well, and Lar España did even better than the average. The SOCIMI assets are already refurbished so the focus will be on top of daily activity.

«We will also be aware for a possible smart rotation, because we are much relaxed and have a solid balance sheet, we can wait for the market to provide opportunities». Miguel Pereda added that retail in Spain is different than other countries, it has stronger fundamentals.

Before the coffee-break networking moment, Alexandre Lima, Director of Iberian Property, has presented the official launch of the second edition of the Iberian Property Investment Awards. «During challenging times, the true measure of success lies in rewarding those who take action. In this sense, Iberian Property is committed to recognise once again the most prominent players and best practices of the sector through this Awards initiative».

Mariano Miguel, Equity Research Analyst – Real Assets, Banco Santander, kicked-off the second part of the event addressing how the tide has turned after the rates peak.

In a positive tone, the analyst highlighted the fact that both Spanish Banks deposit beta and asset quality are under control. Also, looking to the Spanish stock market there is a stable dividend spread and the listed property companies are amongst the “cheapest sectors”. In his opinion dividends play a huge role, and transparency, liquidity and valuation are some of the most attractive factors to invest in listed real estate sector.

Focused on the medium-term horizon, Mariano Miguel defended a prudent optimistic position, underlying the importance for investors to diversify not only between asset classes, but also among companies in those asset classes. On the European landscape, he believes Spain stands out as one of the best positioned countries.

The second-round table of the morning, moderated by Carlos Portocarrero, Real Estate Partner at Clifford Chance, brought together Tamara Marañón, Director of Capital Markets at AEDAS Homes; José Ramón Iturriaga, Fund Manager at Abante Asessores; Jon Armentia Mendaza, Corporate Director and CFO of Lar España; Ignacio Carvajal, Partner & Portfolio Manager at Cartesio; and Aurore Anbergen, Head of Investor Relations at Ascencio; to follow up the debate on the cash returns for the real estate market.

Tamara Marañón, Director of Capital Markets at AEDAS Homes, highlighted the listed real estate sector's capacity to remunerate shareholders and used the case of AEDAS Homes as an example to talk about housing as an option for recurring dividends. The director recalled how AEDAS Homes has paid out more than 330 million euros to shareholders since 2021 and the company's objective is to continue to meet its operational targets and to continue to provide attractive and competitive shareholder remuneration. «AEDAS Homes' intention is to maintain a dividend policy aligned with the evolution of the business», she remarked.

On a general level, Tamara Marañón praised the real estate sector as a good choice for investors looking for sustainable and recurring dividends. She listed two key factors in this regard: 1) the high visibility on future housing deliveries for the coming years; and 2) the strong long-term demographic trends in the main residential markets, where new housing supply is well below structural demand.

José Ramón Iturriaga, Fund Manager of Abante Asesores, insisted that the market needs to start assessing both the fundamentals and the quality of the assets of listed real estate companies, which are trading at a steep discount to the value of their assets. «There are starting to be reasons to close the discount in the valuations of listed companies and the market will have to start looking at European listed companies and, in particular, Spanish ones. In some cases, they offer double-digit dividend yields on a recurring basis, which is nonsense».

The manager also insisted that there may still be adjustments in offices, where the cycle is behind that of shopping centres, but that the worst is over and that the stock market should start to anticipate this scenario, as it is already doing.

Iturriaga illustrated the case with a specific real estate investment fund he launched in the middle of last year, covering national and European listed companies, including around 10 Spanish SOCIMIs, which is already offering returns of 20%, a sign that «the market is starting to take notice and that, after the discounts, listed real estate is back on investors' radar».

Jon Armentia Mendaza, Corporate Director and CFO of Lar España, defended that we are at a good moment, between phases with recovery on the outlook. For the SOCIMI, 2023 was a year of increased footfall figures, even tenants have grown their sales, and the net income increased by double digit. «In 3 months, we will distribute the highest dividend in our history, and our cash flow on assets increased», he stressed.

When questioned about the reasons behind the specialization in retail, Jon Armentia recalled that «the group started with multiple products in 2014, but after a few years we thought retail was the asset class where we could differentiate ourselves». For 2024, one of the focuses will lay in achieving the most efficient financing deals to complement the operative excellency.

For its part, Ignacio Carvajal, Partner & Portfolio Manager at Cartesio, enlightened participants on whether NAV was the right metric to evaluate real estate companies. He explained that the valuation matrix is always useful for an analyst, however NAV is not used in the US for example.

«In Europe, valuers do a discounted cash flow (DCF) for 10 years, input strategic and operations plan with hypotheses…the problem is related to those hypotheses, which take into account lots of sensible variables like rents and exit yields». On the other hand in the US, they use multiples on cash flow, so there is less risk of being wrong, but they don’t fully measure potential changes. Nonetheless, the conclusion for the Partner at Cartesiao is simple: if the company creates value it should trade at a Premium NAV.

Also providing international context, Aurore Anbergen, Head of Investor Relations at Ascencio, admitted investors recognize the value in listed real estate. The Belgium REIT is active in its origin country, France and Spain, specifically investing in retail parks and supermarkets.

Regarding the operation under the SOCIMI regime in Spain, she stated that the fiscal advantages and the easy access capital were the two main advantages. Also, the possibility to buy shares gives their investors an indirectly ownership of real estate with a professional team, and a diversified portfolio. «Ascencio is comfortable to further develop its presence in Spain, which until date represents only 4% of the total portfolio».

Matthew Candy, Global Managing Partner, Generative AI, IBM, hosted the last keynote presentation of the day, sharing for the effect some breakthrough ideas on how Artificial Intelligence can help businesses and companies.

Having started by taking us back to 1994, with the first announcements of the internet, he recalled how back then even the wildest predictions that people made were way off in terms of the real impact it had. «Once the internet was launched it took 7 years to reach 100 million users, and now we fast forward to OpenAI with ChatGPT which took 2 months to reach 100 million users… my view is 1999 is happening all over again, but way faster and with greater impact».

Matthew Candy deconstructed the novelty buzz on Artificial Intelligence (AI), emphasising there are 67 years of science and research work behind it, and he explained that AI is about putting machines performing what requires human intelligence.

On the IBM expert view, this will be the largest driver of GDP growth that we have seen in decades, ranging from 3 to 4 trillion euros worth of new economic benefits, and massive productivity gains in many areas of knowledge work within organisations.

He also forewarned the most sceptical ones that «over 70% of software companies you use in your business, whether you like it or not, will be infusing this technology, impacting your activity».

In the real estate industry between €110 and €180 billion of new value is going to get created purely through this one technology, from more efficient operating models and productivity, from better customer experience being able to retain tenants, generating new revenue streamsand better use of the assets that investors already own.

The second-round table of the morning, moderated by António Gil Machado, Partner at Grupo Iberinmo, brought together Valentina Shegoyan, Founding Partner at OPREIM; Bill Kistler, Founder and Managing Partner at UrbanOvation; and Álvaro Ontañón, Head of IT at MERLIN Properties; to follow up the debate on the opportunities revealed by this new Tech & AI wave.

Bill Kistler, Founder and Managing Partner at UrbanOvation, sustained that «artificial intelligence is one of the most transformative technologies for the real estate industry, frankly some say more than electricity, but many people underestimate it as a fantastic productivity tool, that will make us all more efficient and serve our customers better».

However, he underlined the danger associated with estimates suggesting there are hundreds of millions of jobs that might disappear over the next 5 to 10 years, and those are essentially the white collar jobs – lawyers, programmers, etc. «We have to look carefully the consequences (not that long term) AI is going to have on demand how and where people work, and what will that do both to our portfolios but also even to cities», so it is an exciting moment with a lot of changes and opportunities, but at the same time a lot of uncertainty and risks, Bill Kistler concluded.

Valentina Shegoyan, Founding Partner at OPREIM, key takeaway was that the real estate businesses should be aware of how AI can help to improve efficiencies and decision making, but we should not forget it's an algorithm that has no sense of surrounding, and that requires a human element to operate it.

«Real estate is miles away from changing its value chain, data is not homogeneous, so real estate companies need to be aware and make themselves future proof by working on historical data sets that would help to implement technology in the best possible manner. For me, AI has very limited capacity to disrupt decisions yet», she concluded.

From a SOCIMI point of view, Álvaro Ontañón, Head of IT at MERLIN Properties, admitted that location, quality of assets and service is beginning to be not enough to stand up from competitors, and technology allows to differentiate businesses at an additional level.

MERLIN already applies artificial intelligence, mainly in a machine learning basis, to improve its customer satisfaction and user experience, analysing data to anticipate demand and providing new services. On a cost cutting perspective, data is key to reduce the operational cost, and improve simple property systems like air, heat, and light.

Besides monitoring and maintenance, Álvaro Ontañón also underlined transparency as a feature to be improved, namely in the capacity to offer different information to the market, through a more accurate and detailed reporting.

PRESENTATIONS (pdf):

• Dominique Moerenhout, CEO of the European Public Real Estate Association (EPRA)
• Matthew Candy, Global Managing Partner, Generative AI, IBM