The listed real estate sector has managed the crisis and is well positioned to face the future

The main leaders of the real estate sector have met on the 15th of February, where they have analysed the new opportunities within the current economic context. Despite inflation and high energy prices, they agreed that the listed real estate sector has managed the crisis well and is in optimal conditions to face the coming years.

More than three hundred managers and professionals attended the fifth edition of the Iberian Reit & Listed Conference, which has already established itself as the most important reference meeting for the real estate sector in Spain and Portugal. Once again the conference took place in the ravishing Westin Palace hotel in Madrid, and counted 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 Ignacio de la Torre, Chief Economist of Arcano Partners, who analysed the Iberian economy within the context of the new world order and whether it is possible for us to benefit in the long term. In this sense, he stated that "we have good fundamentals" and therefore "there is light at the end of the tunnel", although inflation is currently above wages; according to the main projections, this situation is expected to change in the coming months.

On the other hand, he expressed his conviction that Europe will avoid recession, although activity will slow down, and predicted that interest rates will soon reach a ceiling and that they will fall to around 2.5% in the eurozone in the medium term, once inflation moderates. According to the economist, this means that «structural interest rates, which are important for the real estate sector, will remain at low levels globally for the next 10-20 years. That is not going to change, because of the demographic trend», he stressed.

Dominique Moerenhout, CEO of the European Public Real Estate Association (EPRA), gave details of how the listed real estate sector faces the future in challenging times and said that «in the coming years we can be cautiously optimistic. The sector has managed the last crisis and is reasonably well positioned to face the future», he added.

The CEO of the EPRA, has also argued that «the main Spanish socimis are performing well in terms of rents and occupancy. Inflation is having a greater impact on income (which they receive via rents) than on operating costs, which is positive for the sector». Dominique Moerenhout defended that the sector is very well positioned to absorb interest rate rises, and his forecast is that «in 2024, investors will return to take positions in the REIT sector, when the economy starts to grow again».

Behind his theory is the steep discount at which the main European REITs are trading, which on average exceeds 40% of their net asset value (NAV). In other words, their market value is well below the value of their portfolios. «There is a disconnect between share prices and company results. And they are a buying opportunity because of that discount. Now is the time to invest in order to be well positioned when the market recovers. If we wait, it may be too late», he concluded.

In the same line, Borja Ortega, CEO of BNP Paribas Real Estate Spain, explained how real estate investors are reacting to this inflationary context and stressed that «we need more and more analysis of transactions and urban policies focused on citizens; then the real estate sector must adapt to them».

The sent-out message had a tone of optimism, acknowledging that «we are more positive now than in November and December. 2022 has been a record year for investment, and although in the last quarter it seemed that covid had been a joke with respect to what was to come, it has not been like that. We have to remain calm».

Borja Ortega insisted that in 2023 there will be a lot of activity in the real estate sector and that Iberia is in the sights of companies, investors and citizens thanks to factors such as the ability to compete via rents compared to other European markets (which have higher rents), or the quality of the assets.

On economic matters, he predicted that Spain and Portugal will manage to escape the recession and that 2023 will be better than expected. However, the head of the French bank's real estate area foresees a fall in the volume of investment for the year of close to 20% (5 points below what he estimated just two months ago), bearing in mind that 2022 closed with record investment figures. In his opinion, stabilisation will come in the middle of the year.

The first panel discussion, moderated by António Gil Machado, director of Iberian Property, 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.

Ismael Clemente, CEO of Merlin Properties, explained that «the underlying trading environment is going to be positive, unless the central banks raise interest rates much more, in that scenario a recession turns out very probable to happen and unemployment to rise». But, in the absence of additional factors, he believes that we are going to see a nominal adjustment in property prices, which is cyclical…meaning we shouldn't worry that much about it.

The truth is that the large socimis assure us that their assets continue to register positive data. In the case of Merlin Properties, one of the listed companies on the Ibex-35, the numbers of its shopping centres are outperforming pre-pandemic figures and that the operators (its tenants) are selling more than their rents are rising due to inflation.

Pere Viñolas, CEO of Colonial, also stressed that «operations are going well, despite the interest rate hikes; we are going through a good operational phase».

Pere Viñolas pointed out that listed companies have more liquidity and transparency, which should translate in higher value. In his own words, «sometimes it seems almost nonsense remaining as a public company, because you are challenged every day, and the traditions and work method you follow to improve society are forgotten».

Miguel Pereda, vice-chairman of Lar España & Chairman of Grupo Lar, stressed that «there is unjustified fear, because we have low debt», nonetheless and although the company has exceeded 2019 figures «we will maintain a cautious approach». He recalled that Lar España has two different types of retail assets - retail parks and shopping centers, - which followed different paces of recovery. «The most important metric, sales per quare meter, is now in a very good level on both, posing a strong outlook for 2023».

In terms of debt, in Miguel Pereda’s view the rising interest rates can bring also good things, what he justified with the restructuring of Lar España bonds (in this case green bonds) for a better adjustment on returns, and to create NAV from the debt side.

Still regarding the stock exchange, David Martínez, CEO of Aedas Homes, has put numbers to the specific case of his company as an example of this discount that drag the listed companies. «In 2017, when we went public, we were almost a 'startup' with a land bank and we were trading at 31 euros per share, while now we are at 15 euros per share, and we pay out 100 million euros in dividends…which honestly doesn’t seem to make much sense». Despite the criticism, the sector hopes that the trend will be reversed in the future.

In terms of the real estate trends David Martínez, closed the panel debate highlighting the change in Spain’s mentality, with a specific movement from the traditional ownership to a pay-per-use model.

Jana Bour, Director of ESG Policy and Advocacy, EPRA, kicked-off the second part of the event addressing the new EU Taxonomy, arguing that the sustainable finance agenda will have an impact on every single stakeholder, but the correlation with the real estate sector will be of increased importance. In this sense, Jana Bour explained that every other legislation will now be connected to the EU taxonomy, a step “truly ground-breaking”.

There are still considerable challenges facing the Taxonomy. Among them, Jana Bour highlighted how it is still incomplete, how it lacks clarity or that it fails to focus on processes for the transition to net zero, such as renovations. Nonetheless, she also stressed out some of its opportunities, like the increase of transparencyand the opening of the debate on how to really decarbonise real estate.

Looking specifically for the listed real estate sector, the main conclusion was that even though there is no obligation to invest in ‘taxonomy aligned assets’, once companies start having to disclosure information, «the risk management activity will tend to push investors to do invest in these assets, besides of course of the ESG preferences of clients that we have been witnessing».

The second-round table of the morning, moderated by Miguel Ferré, Chairman of the Editorial Council of Iberian Property, brought together Guillermo Astorqui, Director of Real Estate Finance Iberia at BNP Paribas; Jon Armentia Mendaza, Corporate Director and CFO of Lar España; Isidoro Tapia, Senior Officer at the Climate Office of the European Investment Bank (EIB); and Filipe Lowndes Marques, partner in Banking and Finance Law at Morais Leitão; to follow up the debate on the taxonomy impact for the real estate market.

Isidoro Tapia, Senior Officer at the Climate Office of EIB, started by sharing the European Investment Bank (EIB) commitment to the decarbonization of buildings, giving the example of the EIB lending to Energy Efficiency (new construction and renovation), which amounted to 5.6 billion euros in 2022, the highest year on record.

The time is of opportunity, and on Isidoro Tapia’s words «what the taxonomy does now is allowing us to speak the same language as the clients, meaning that we have both the same understanding of what means to be green». This common language is also appliable between banks, which will all be imposing the same criteria to its clients.

As for investors, the advice was to not underestimate the new generation of lease agreements, and instead take the time to assess the business model, portfolio performance, and revisit the relationships with the tenants.

Filipe Lowndes Marques, Partner in Banking and Finance Law at Morais Leitão, also defended that the taxonomy will facilitate comparable metrics and be an enabler of change. For him, «it is too reductive to look at taxonomy as simply a way to acess broader pools of financing».

Going even further, Filipe Lowndes Marques stated that up to date most due diligences processes included ESG on the technical side, but «the truth is that from now on we should have almost a complementary ESG due diligence, because the objectives are indeed different» – while the technical aspects can relate for example to the robustness of the asset, the ESG main goal would be to future proof the asset.

Guillermo Astorqui, Director of Real Estate Finance Iberia at BNP Paribas, agreed on this matter and commented that «a green asset should be able to generate a higher ROI per square meter». As a matter fact, for him ‘brown assets’ will for sure become illiquid at the market…it is only a matter of time.

Regarding the possibility of assets being abandoned due to non-compliance with environmental criteria, Guillermo Astorqui confessed that «yes, it is a true risk, but it’s up to us (the industry) to assume the responsibility to support Capex assets that demonstrate a strong initiative and purpose towards the green transition».

Jon Armentia Mendaza, Corporate Director and CFO of Lar España, illustrated that for the Socimi sustainability is a global issue, and «although it is true that the impacts and results of ESG strategies crystalize at the asset level, in order to be a truly green company the first step must be taken at the governance level».

The roadmap of measures must be in line with the company's business model, and most importantly it is crucial to monitor how this task evolves and how the strategy is progressing, which involves active listening the various stakeholders. «In our case, we must have a close relationship with the tenants and work with analysts to know what they expect from the company in terms of sustainability, what milestones and KPIs (Key Performance Indicators) can be set, for them to be able to understand how the company is progressing».

The final panel discussion, moderated by Richard Betts, Director of Real Asset Media, focused on how the listed real estate sector can take advantage of new opportunities and convert them into real shareholder value. Participants in the round table included Carlos Portocarrero, Real Estate Partner at Clifford Chance; Inés Arellano, Director of Merlin Properties; Carlos Krohmer, Director of Corporate Development at Colonial; Paloma Taltavull, Professor of Applied Economic Analysis at the University of Alicante; and Alfredo Echevarría, Director of Analysis at Lighthouse.

Paloma Taltavull, Professor of Applied Economic Analysis at the University of Alicante, started by sharing an academic point of view, mentioning the cycles in real estate. «The economy needs a stable cycle to flourish and to feed back into economic growth».

The real estate sector has a very clear long-term trend and for Paloma Taltavull there are three fundamental pillars – the population and its demand, the capacity to spend with salaries, and economic growth – not to mention of course the financial influence. In her opinion, «if there is no major shock, in the next decade we will see a positive evolution in these fundamentals».

Alfredo Echevarría, Director of Analysis at Lighthouse and Representative of EFFAS (European Federation of Financial Analysts Societies), underlined that the particularity of real estate lies in the cash-flow generation, and «even though the NAV is a good primary indicator, in the end the analyst has to further extend the valuation of this potential generation of income».

Diving in the Iberia culture, Carlos Krohmer, Director of Corporate Development at Colonial, stressed that Iberian institutional investors still have a lot of the antique national vision, to be specialized in only one country…which may be a formula of success on borrowed time. In his opinion, the Pan-European diversification is a winning strategy and «liquidity and critical mass will be factors of extreme importance to look upon the next months».

Carlos Portocarrero, Real Estate Partner at Clifford Chance, pointed out that people are on the prudency side, looking for buying opportunities with discount, and thus willing to wait. «What sometimes seem to be forgotten is that the liquidity level is massive and real estate is rather much a safe asset type than an opportunistic one». Moving even further, Carlos Portocarrero admitted that when the general view change, it will all happen very rapidly, and then «the transactions will come like a tsunami».

Inés Arellano, Director of Merlin Properties, reminded the audience how all those trending headlines – such as “office is dead, people will work from home”; “retail to be replaced by e-commerce”; etc – failed to fulfil.

We have been through a lot of uncertainty which only changed its cause, but never really faded. On Inés Arellano’s view the NAV is still lacking adjustment, and «the market behaviour will really depend on what will happen with interest rates on the short-term».

As all experts agreed, real estate does depend a lot on the macroenvironment, however different asset classes depend on different KPIs. The Director of Merlin Properties classified 2023 as “a year on the desert”, when speaking about capital markets, since people are already waiting for the second half of the year.

On the other hand, the operating side shows a totally different panorama – 2022 was a great year, and «2023 follows the same trends with incredible occupancy levels across all segments, and with rents remaining stable or even increasing in some cases. If you know where to focus, real estate offers a lot of good opportunities», concluded Inés Arellano.

PRESENTATIONS (pdf):

• Dominique Moerenhout, CEO of the European Public Real Estate Association (EPRA)
• Borja Ortega, CEO of BNP Paribas Real Estate Spain
• Jana Bour, Director of ESG Policy and Advocacy, EPRA