CEE Summit: lack of exposure to listed market is a problem

Lack of representation in the listed market is holding Central and Eastern European real estate companies back, delegates heard at Real Asset Media’s 9th CEE Summit, which was held in Warsaw last week.

Simon Robson Brown, Managing Director, Head of European listed real estate, European portfolio manager, Morgan Stanley IM

“It is not a real estate issue,” said Simon Robson Brown, managing director, head of European listed real estate, European portfolio manager, Morgan Stanley Investment Management. “It’s a lack of representation of Central Europe in our benchmark.”

Most investors use the FTSE EPRA Nareit Developed Index, which states that 75% of assets have to be invested in a “developed market”. The rule is that “a prospective or existing index constituent will not be assigned a developed market nationality” unless during each of the previous two years it has “derived less than 75% (prospective) or 50% (existing) of its total annual EBITDA from developed markets”.

Only Poland qualifies to be in the “developed” category, which is a serious headwind.

“It is clear that CEE exposure in the FTSE EPRA Nareit Developed benchmark is extremely limited,” said Robson Brown.

In the FTSE’s Equity country classification, Hungary and the Czech Republic have advanced emerging status, while Romania has secondary emerging status. Other countries in the region are in the Frontier category: they include Bulgaria, Estonia, Latvia, Lithuania, Serbia, Slovakia and Slovenia.

“I’m struggling to see why the Czech Republic and Hungary are not classified as developed markets,” said Robson Brown. “It should be an easy kill to get them over the line. Hungary is very nearly there, Czech just needs a developed derivatives market to get the grade. I would urge regulators and politicians to make the last push, so that more listed companies can actually invest more in CEE.”

In the new interest rate environment, international investors are focusing on balance sheet strength, realistic pricing of real estate assets and potential for continued rental growth. Attractive investments in the listed sector are companies that are “secular winners”, meaning they operate in structural growth markets and have strong tenant demands. In Europe they include student housing, logistics, healthcare and self-storage.

 “Outside the FTSE EPRA benchmark, stocks with CEE exposure are small and illiquid with low free floats,” said Robson Brown. “If you add it all up, it represents about 2% of the benchmark. REITs are about the democratisation of real estate, so they shouldn’t be so tightly held. It’s easy to say and difficult to put into action, but surely that should be the goal.”

REITs have a long-term history of outperformance and attractive returns. European REITs have returned 6.2% from the end of December 2001 to the end of March 2023.

 “We believe REITs are attractive versus the private real estate and broader equities market,” he said. “REIT introduction can have a positive impact on domestic property markets, as shown by the growth in the market cap of Spanish SOCIMIs following REIT regime adaptation.”