‘Optimise at all times’ the message for listed real estate
The European listed sector has come a long way since the early 2000s as Harm Meijer, managing director and co-founder, ICAMAP explained in the latest of the EPRA Myth Buster series.
Meijer said the sector is much more professional, there is now much more data available, there is greater transparency and better corporate governance.
“It’s a huge Improvement and we really have to thank the companies and EPRA for their commitment in this area,” he told Real Asset Insight’s Richard Betts.
There are still hindrances: “In Europe you have many countries, many languages many cultures, many laws and many taxes. The more we can harmonise this, the better it will be for property.”
But the process of improvement is long term, and there is still room for companies themselves to improve, notably in terms of their understanding of capital markets.
“Some companies understand capital markets, some only partly, some absolutely not. This can be dangerous because it is very important that capital markets have the trust of companies,” Meijer said.
He added that without trust, markets will not provide capital and could revert to the saying, ‘if in doubt throw it out’.
The onus is also on companies to be “optimised at all times”, Meijer said. “Do they have the right assets, are they creating value, are costs being minimised, is the balance sheet okay, and is corporate governance optimal as well?
“Frankly, you don’t want to run into a downturn and the capital markets start to question whether you will make it, whether you will have to raise equity,” he said. Ultimately, it is a company’s track record that is key.
All a question of mindset
But Meijer said it is also a question of mindset. “Too many companies are really focused on every stakeholder there is. But you also have to focus on the shareholder because, in the end, it is about returns and if returns are not being generated they will not give you the capital.”
Meijer also questions some people’s preoccupation with net asset value, NAV per share – the book value per share. “This intense focus basically harms the growth of the sector, in my view,” he said.
He explained that NAV per share does not capture all of a company’s characteristics: it is based on a historic valuation, it is subjective and undertaken by a third party, and it does not reflect quality of the management, track record or governance strategy. “These are not in the balance sheet in terms of how much depth they carry.”
So to facilitate growth, Meijer said if equity can be raised when the market is hot, companies should go for it. “If you can do a deal which adds value per share while not worsening the risk profile of your company, that is absolutely key,” he added.
The EU rules on prospectuses are being relaxed which should make equity raising easier, but Meijer cautioned that “we have to be careful that the alignment works between companies and investors.”
And he added that there are too many rules. “If you look at some of the annual accounts these days these are very big book works and sometimes they get so big that I think we’re losing a bit of what we really need to focus on.”
He said that there is a need to concentrate on making sure that financial metrics are calculated in the same way among property companies, and with the same frequency.
“Most of them are calculated only once a year or half yearly and it would be great if we could move that to quarterly.”
And, if a further metric could be added to the reports that companies produce? Meijer would choose CO2 per square meter over the lifetime of a building or whole property portfolio. “That is what the future is these days,” he said.
