Elamine predicts that champions must emerge in each subsector, reports Doug Morrison
The chief executive of one of Germany’s leading REITs predicts a wave of consolidation across the country’s listed sector as both companies and investors seek to improve share price performance.
Olivier Elamine of Alstria Office told delegates at the annual conference of the European Public Real Estate Association (EPRA) in Berlin, that a “champion” needs to emerge in each sub-sector of German commercial property to help attract more institutional investment.
He declared: “We will have one large company in each sector and that will dominate the market. The question is, what is the name of this company going to be? That is still open but I do believe that five years down the road we will have had consolidation in the market, simply because there are too many of us today and all of us – including ourselves – are too small to remain the way we are for a longer period of time.”
The combined market capitalisation of Germany’s REITs is just €6bn but “size matters”, according to Elamine, who added: “If you had one company with a €1.5bn-€2bn market cap, that would be success.”
Jean-Francois Ott, president of Orco Property Group, which has assets in France and Germany, took a contrary view. “What is important to me is that the champion in Germany shows proof of price per square metre. At the end of the day, that is all it is,” he said. “If you look at the champions on the Paris or London stock exchanges they usually have lots of square metres in Paris and London, and guess what? The prices are five, six, seven times higher than in Germany.”
Ott’s comment was one of the few from the conference platform that touched on the performance of the underlying assets. This was a conference that dwelled on the relative efficiencies and performance of the various vehicles, or “wrappers”, investors prefer for their real estate holdings.
How close are performance links? EPRA clearly exists to promote the listed sector, and the association used Berlin to unveil research that claimed that investing in listed companies produced a performance closely linked to core real estate. Yet EPRA’s own indices also show an average discount to net asset value of European commercial property of up to 25% over the past year, and Germany is no different.
Germany’s REIT issues are compounded by the market remaining relatively small compared with other European countries, partly because of the one-time dominance of the country’s open-ended funds.
Though everyone at the conference acknowledged that the downfall of the open-ended funds represented an opportunity for the listed sector to step into the breach, they know too that the sector has to be viewed by investors on its own merits. As EPRA’s chief executive Philip Charls put it, the future growth of Germany’s listed sector needs to be “decoupled” from that of the open-ended funds.
Unfortunately, as Charls also unveiled to delegates, another EPRA study shows that Germany’s listed property companies suffer from a poor image. One reason for the perception problem is Gagfah, the listed residential specialist that has come to epitomise the property company as rapacious landlord. Boardroom upheaval and high-profile litigation have beset Gagfah and yet, like other residential companies, its share price has soared this year on the back of growing demand for residential rental property. Somehow Gagfah has emerged as a residential “champion” of sorts.
Germany’s listed sector has also been characterised as volatile, but both Elamine and Ott dismissed that charge as “just an excuse” for the stay-away institutions and their advisers. “The way we see real estate, what we sell to our clients is stable cash-flow and capital growth over time. If you are investing for a long time then volatility should not be an issue,” said Elamine.
Ott declared: “Volatility is good. That’s how brokers make their money. Some of those pension funds we are chasing, we hope that they buy the stock and keep it forever. They are great but not essential. When we talk about retail investors, most of them are day traders. Volatility is what allows the stockbrokers of the world to make their money. Why are we not trading as we were in 2005 and 2006? In 2005 we had huge volatility and we were trading at NAV-plus, and all the brokers loved us. They had a good story to sell.”
Whether consolidation will have the desired impact on Germany’s REITs is a moot point. For now they have to trade at a seemingly unshakeable discount to NAV. After the conference Elamine was phlegmatic about the stock market prospects for Alstria Office. He pointed out that since floating at a 20% premium to NAV, the company sank to an 80% discount and is now trading at a 20% discount and yet “nothing has fundamentally changed with the business”.
He told Real Estate Capital: “I’m not saying that as a manager you cannot influence the discount – to make it bigger or smaller. But overall today all the listed companies in Europe on average are trading at a 20% discount to NAV. It cannot be that we’re all that bad.”