EPRA (European Public Real Estate Association) was set up in 1999 in Amsterdam and carries out a mission to promote, represent and develop the listed real estate sector in Europe. During its 21 years of activity, the organization counts 273 members (65% listed real estate companies, 25% investors and 10% other stakeholders). Overall it represents approximately EUR 600 bn of real estate gross assets value. Dominique Moerenhout joined EPRA as CEO in 2017.
To start off, could you explain the circumstances in which EPRA was created and why it was deemed necessary for a public real estate association to exist?
The core reason for creating EPRA was that many investors at the time felt the need for a listed real estate index series - in other words, a means to track the performance of their fund compared to a benchmark. Today, together with FTSE Russell and Nareit, EPRA is managing the most used real estate index in the world "FTSE EPRA Nareit Real Estate Index Series".
We carry out fundamental research and make it available to investors, to position the benefits of the European listed real estate sector compared to other asset classes. We also created the backbone for both the financial and ESG (Environmental, Social and Governance) reporting for the sector. So today if you look at the annual reports of all listed real estate companies in Europe, in almost all cases you will come across the EPRA financial and sustainability metrics or what we call "best practice recommendations".
Another big component is "investor outreach" - on a daily basis we are in dialogue with investors to provide them with data about the sector and give them the right arguments to increase their allocation to the European listed real estate sector. A form of education if you wish, about the benefits and the in-and-outs of the sector. Last but not least, we also are very active in improving both national and Pan-European regulatory and tax environments in order to facilitate investment in our sector for institutional and retail investors.
Overwhelmingly your members are located in Western Europe, very few in the Central and Eastern part. Why is that?
That's a good question and honestly I would be pleased to welcome another 40-50 members from CEE. There is, however, a good reason behind this because when you look at the real estate markets there the number of listed real estate companies is relatively limited.
But that is why we want to help grow it and develop the appropriate REIT regimes to motivate companies who are presently private to come to the public markets. There are only three REIT regimes in the CEE countries for now (Bulgaria, Lithuania and Hungary), but we're very hopeful that Poland will implement one as well - we know what the regime should look like but we have been waiting on a sign off for about two and a half years now.
It is important to stress out that REITs and the listed real estate sector in general are essential to the local economy at large: they create and host a significant number of jobs (over 1 million jobs so far in Europe), they (re)develop major urban areas, they invest in communities and they also are a substantial tax contributor.
What was more specifically the experience in Poland, what is holding back the implementation of a REIT regime?
The real estate sector in Poland is so large that it is hard to believe there is no REIT regime implemented yet. But to set in place such a project you need political sign off, and this is the missing element today. The market is waiting for it, and I’m confident it will work out at some stage !
Referring to the lobbying side of your work, how do you typically engage with the relevant entities? Do you find it easy to create dialogue?
This plays out in two ways: we act at European level and also at a local one. For the latter we always work very closely with local associations, National Banks and the Ministry of Finance. At European level we have the advantage of being very close to EU Commission and Parliament.
We had a big success in the course of last year. After two and a half years of intense lobbying, we persuaded The European Commission to revise the European legislation for insurance companies' investments, the so called “Solvency II” regulation, which prevented them from investing as they wish in the listed real estate sector . Specifically, if an insurance company wanted to invest in a private real estate fund, 25% capital requirements were required versus 39% for an investment in listed real estate.
For us this was a very important subject because insurance companies represent the largest pool of institutional capital in Europe - three times the size of the pension fund industry. We lobbied for two and a half years to persuade the Commission to lower the requirements to the same level as for private, and they finally agreed (with a few constraints) to lower it even further to 22%. A very big win, because we are talking about assets worth EUR 12 trillion under the management of insurance companies. If they would decide to swap even 20 basis points of their asset allocation from any single asset class to the listed real estate sector, we could double its size.
Congratulations on this accomplishment. Speaking of present days, what would you say are the most critical issues on your agenda?
We need to help our sector deal with the COVID-19 crisis. Everybody is suffering because of this, to different extents of course, but nobody can really call themselves winners.
What we can tell already is that we are dealing with a liquidity crisis triggered by the substantial shutdown in cash flows to many businesses, compared to the Global Financial Crisis (GFC) in 2008 which had an element of liquidity but in its essence, it was a solvency crisis.
Moreover, our sector was much better prepared to deal with the situation this time around - the debt profile and the balance sheet structure of listed real estate in Europe is much stronger in this crisis than in 2008.
Another thing is that not all sectors suffer to the same extent, and there are many variances between countries. The UK government for example has put in place a moratorium on commercial tenants eviction - so today, if you are the tenant in a shopping mall or an office, if you decide not to pay your rent you are legally allowed to do so.
This will likely have an impact on the nature of future lease contracts. Tenants are looking for more flexibility, shorter lease durations, or wishing to pay rent based on turnover rather than m² in the retail sector.
Since the pandemic started did you notice a change in investor behavior?
On average, investors' behavior has been what I call "risk-off" - they are not panicking at all, but they have a different approach to risk than before the crisis. And they are paying more attention to how others are behaving.
As an example we experienced in our recent (virtual) events that investors who used to prefer one-on-one meetings, are now going for group discussions. This gives an indication that they want to listen and understand what questions and concerns their peers have.
Real estate investment volumes vary from one country to another, but on average the level is about 40-60% lower compared to a normal year (except for logistics and residential). Overall I would say investors were more bullish before the pandemic, and now patience and calm is the temporary norm.
What is your outlook for the coming 1-2 years, where do you see the European markets heading?
In general terms we have to be realistic and accept that we will face a recession across Europe. But it is not an entirely black picture - we have commissioned a report with Oxford Economics which foresees a return to pre-crisis levels by the second quarter of 2022. We made a similar analysis to see how long it took to recover from the GFC… and it took 8 years.
So even if short term we have to be careful, the recovery time will be shorter and the growth potential on our continent in much higher than elsewhere. Especially in CEE, and we are the first to lend our help and expertise to make it happen.
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