The European real estate investment market continues to evolve relative to societal and technical evolution. Unravelling within the retail sector has culminated in unprecedented challenges; meanwhile, the emergence and growth of ‘niche’ sub-sectors, such as hotels, self-storage and build-to-rent, have added to the diversity and sense of opportunity. Further to this, the prominence investors place on non-financial measures of performance – including Environmental, Social and Governance (ESG) – continues to grow and characterise the real estate investment market.
Figure 2 exhibits the explanatory powers on a risk-adjusted return basis of country focus, sectoral focus and company level attributes at the aggregate level. Country and sector level variables respectively explain 2.39% and 1.95% of the total variation in performance across the six European markets, while company-specific variables collectively account for 43.62% of the same variation. This suggests that risk-adjusted returns are more closely aligned with individual company characteristics.
In terms of company-specific attributes, unsurprisingly return on equity has the highest explanatory power, both individually (41.14%) and marginally (4.63%), with market capitalisation accounting for 6.33% and 0.02% respectively. By comparing the change in the size of explanatory power, we observe that market capitalisation has nonetheless shown a reduced significance in terms of explanatory power over time.
The results for return on equity are slightly more ambiguous. Over the two sub-periods, the variable has displayed a rise in explanatory power at the margin (from 3.73% to 5.44%) but a remarkable reduction (49.44% to 20.7%) when it is encapsulated alone as the independent variable in the regression model. It is also interesting to note that dividend yield has become a much more important attribute in explaining risk-adjusted performance over time, judged by its change in partial R2 contributed to the regression models.
The results also highlight that the heterogeneity between sectors across the sample countries has grown over time, as indicated by the increase in the explanatory power of the sector dummies over the two sub-periods: from 3.51% to 4.10% and 0.82% to 2.80% employing both methods (Figure 3).
Institutional investors considering European listed real estate companies need to more fully understand and comprehend the performance drivers attributable to corporate structures and company specific attributes. Indeed, given that the performance of listed real estate companies is predicated on underlying real asset portfolios, the impact and significance of company-specific attributes are more pronounced than for other listed companies.
Further to this, it is also apparent that company-specific attributes play an important role in the optimisation of performance in real estate upcycles and in ‘sheltering’ companies in down-cycles. This study demonstrated that higher LTV ratios had a negative impact on risk-adjusted performance over the study period. Further to this, the relationship between dividend yield and risk-adjusted performance implies that companies that retained and reinvested profits amidst turbulent market conditions have realised superior performance over the entire study period.