If you live north of the Mason-Dixon line, you and your neighbors probably call the 1861–1865 U.S. conflict the “Civil War.” If you live just south of the line, y’all probably refer to it as the “War Between the States.” If you live in the Deep South, it’s “The War of Northern Aggression.” And you probably feel that whatever term you use is the right one because everyone you know calls it that as well.
We all are afflicted with a type of blindness that makes us think that the way we see things is the way others see them. This is particularly true if you are surrounded by people who actually do see things the way you do.
This blindness plays out in our investment relationships as well daily life. Each year, IREI asks members of its Editorial Advisory Boards in the Americas, Europe and Asia Pacific how well they think their managers are doing, particularly when it comes to transparency and investor relations. Without fail, the majority of managers say they are doing really well, could hardly do any better. Also without fail, the LPs say their managers (who tend to be the ones who say they are doing really well) are doing just OK, and they have a long way to go if they want to be really good.
I was at the EPRA annual conference in Paris a couple of weeks ago, and it looks like the European listed market has a similar disconnect. In a pre-conference poll, attendees were asked to rate the level of alignment between companies and investors on a scale from 0 (no alignment at all) to 100 (perfectly aligned). The average rating came in at just above 50. However, 20 percent of the companies rated alignment as higher than 75, while only 5 percent of investors see alignment at that level.
In the discussion that followed the poll results, as well as an in-house quick tally on how well the industry is aligned, investors said that they thought alignment could be significantly improved if management compensation and incentives were based on total shareholder return (TSR) metrics. Investors would also like to see more transparency and disclosure, especially on business strategies. Company reps in the room said the TSR approach might work, but it’s not a clear-cut answer. Companies felt that implementing TSR-type metrics would need a nuanced approach to work in practice, especially given concerns about the short-term nature of equity markets behavior. (You have the feeling they were trying to be diplomatic in saying, “not on your life” or words to that effect.) They also said that if investors want the companies to be more aligned with investor interests, then the investors are going to have to step it up and take a more active role by voting their interests and engaging directly rather than just sitting on the sidelines and complaining (or words to that effect).
The alignment issue is important because the listed sector desperately wants the stability and growth-potential that institutional cash flows provide. But it’s finding itself caught in a Catch-22. Companies need the influx of institutional capital to grow, yet extremely few are large enough to accept institutional capital flows without being overwhelmed by the size of the bite that institutions take. How to attain this growth is still the primary problem facing the European listed market.
A couple of years ago, all eyes were on Germany with the hope that a strong real estate securities market there would pull all listed markets up, increase their size and make them more attractive to institutions. So far, those hopes have been dashed. Germans simply don’t like volatility, and equities are volatile. Add in that the largest German listed company, IVG, is pretty much on its knees, and the German listed market doesn’t look like it is taking anyone anywhere fast — at least not taking anyone up.
But EPRA isn’t giving up. It is aggressively marketing European listed companies, going so far as to open an office in Hong Kong. It is publishing research showing that portfolios that include listed real estate alongside private real estate do better than those that don’t. And it is working with various government agencies to make regulations more REIT-friendly.
Despite the fact that the industry is still struggling to attain the growth it thinks it should have, there was a feeling of optimism at the conference. It just felt good to be there among people who were all pulling for their industry to make a difference. It’s the type of group you want to visit with again next year to see how it all plays out.
Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.
