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Listed European real estate revolution opens up exciting opportunities for global investors - Neuberger Berman

“Listed European property has experienced a revolution in the past decade. The widespread adoption of REIT structures in major markets and big steps forward in corporate governance are positively transforming global investors’ perception of the attractiveness of the sector,” said Gillian Tiltman, Portfolio Manager for UK and Continental European real estate securities at US-based investment manager Neuberger Berman.

Gillian Tiltman

Gillian Tiltman, Senior Vice President, joined the firm in 2014. Gillian is a Portfolio Manager for the UK and Continental European Real Estate portion of the Real Estate Securities group. Previously, she was with M&G Investments in London for four years as a fund manager responsible for asset allocation and stock picking decisions, and for two and a half years as a dedicated fund analyst. Prior to that, she served as an analyst in the housing group of the Municipal Housing Finance Investment Banking division at Merrill Lynch in New York. Gillian began her career in 2004 at Deutsche Bank Securities in New York, where she was a member of the product management team. Gillian received a BA from Princeton University.

“It’s a dramatically different landscape to what it was just a few years ago. It’s a very exciting time. Now there are plenty of opportunities to invest in European listed real estate,” she said during an interview at Neuberger Berman’s office in Berkley Square in London’s West End.
Tiltman called the introduction of the REIT structure in the UK in 2007, which followed France four years earlier, a “trial by fire” for European listed real estate companies and the British firms in particular, as these debuts were followed by the “turning point” of the global financial crisis.
“They (the companies in Europe’s two largest listed markets) had little alternative. REITs were already old news in Australia and the US by then, but the UK REIT structure came to Europe at the top of the market. Property companies had to pay 2% of their grossly inflated GAV to convert to REIT status and [on top of that] they didn’t know how to behave like REITs. They were very much property companies trying to ride a cycle without thinking about how to pay out a cash dividend, which is not negotiable [under a REIT regime]. Plus, UK REITs were required to have a pre-emptive rights issue if they needed to raise capital. It was tough in the crisis that followed,” she said.
When Tiltman first started looking at global real estate securities in 2008, her clients or prospects always commented during meetings and presentations that her then-employer, prior to Neuberger Berman, had started investing so late in Europe.
“My response then was that it was not me taking a top-down view or us making a call on the Euro, it was more that there were not very many interesting companies to invest in Europe ex-UK and that corporate governance was really lacking,” she said.
Tiltman added that UK REITs have undergone significant management changes in the past decade, with the boards generally in good shape, although the companies themselves are currently at the mercy of politics with the Brexit process. She pointed to industrial REIT SEGRO as an example of a listed UK real estate company that has successfully transformed itself in the last ten years.
“SEGRO offered a genuinely amazing opportunity at a time when everybody was just terrified. In 2009, the company’s management offered its investors a very diluted rights issue. Then they came back a few months later with another diluted rights issue but also the opportunity to buy the assets from [its flailing peer] Brixton. Now Segro is a FTSE-100 stock and the darling of the sector. Neuberger Berman is also an investor in SEGRO,” she said.
“Since 2012/13, a raft of German residential companies and Spanish REITs – or SOCIMIs – have been floated across Europe while more established listed real estate stocks have successfully transformed their businesses into ‘proper REITs’ that are now providing ‘decent’ disclosure, also on ESG (Environmental, Social and Governance) policies,” Tiltman said.
“Companies are talking a lot more about the ‘E’. The ‘G’ is something I have been focused on as an investor for a very long time. I think governance is really important. If you are a publicly listed company, you have to have that contract with your shareholders. We have been investing for 80 years. It’s been something on our minds for a long time.”
She added that EPRA had played an important role in the transformation and ongoing development of the European listed real estate sector, with a growing body of research for its members and an expanding events calendar.
“EPRA is doing a cracking job. The investor outreach programmes and corporate access gatherings are fabulous events. They’re modelled on the Nareit programme, and they give you the opportunity to see all these companies, listen to their presentations or have one-to-one meetings.”
Neuberger Berman’s Global Real Estate Fund’s current weighting to Europe is roughly 15%, compared with 55% for North America and 30% for Asia.
Asked whether the European weighting may rise in due course, Tiltman said: “We tend to take a bit of a geographically neutral approach. We take our big bets on stock selection because we believe we are bottom-up stock pickers and that’s how we generate alpha for our investors. In terms of our performance, the global fund has been very successful since inception (in 2015) and has performed very well, both versus the index benchmark and our peers. We have been in the top quartile of our peer group for the past four years.”
Specialty and residential REITs account for roughly 40% of the fund’s weighting worldwide, and Tiltman and her three colleagues covering real estate securities in New York and Hong Kong are also very interested in listed property companies profiting from the structural change in the markets.
“We are interested in anything to do with what we call the ‘Amazonification’ of retail. And that has been the rise of logistics, for sure. We call logistics the gift that keeps on giving. These businesses just keep on outperforming, doing a great job and offering an attractive dividend,” she said.
The same is true of student housing and self-storage, Tiltman added: “Together with sheds, we call them the ‘three S’s.’  We think it’s a tremendous opportunity to invest in all these sectors globally because their cycles are not synchronised. If you’re running a dividend or a growth fund like we are, you have the opportunity to own a bunch of companies that complement each other but also do different things. That is at the heart of my philosophy as a Portfolio Manager. If you own 50 companies that are all doing the same thing, you’re at the whim of the market, and that’s something you want to avoid.”
Residential is another alternative real estate sector offering great growth potential, particularly in Germany, which is also leading the growth of a new cross-border investment market in rented housing in Europe, she said: “Vonovia, Deutsche Wohnen, Adler Real Estate, these are all German residential real estate securities. They’re not REITs, but they’re fabulous businesses that continue to see rental growth. Vonovia is definitely challenging Unibail-Rodamco-Westfield as the big bellwether for the European real estate sector.”
What Neuberger Berman does not do is invest in cash boxes; she added: “We don’t pay a premium for cash. We didn’t invest in Spanish REITs from day one because they were all cash boxes and we don’t believe in paying a premium for cash, even with folks that have a tremendous track record. But we did buy them once they were invested and some of them have done great. We like to invest in income-producing real estate, and if that’s a new IPO with folks who have been doing this for ages, that’s absolutely fine.”
Asked whether the structure of Neuberger Berman’s portfolio is rotating from retail towards a greater focus on ‘beds and sheds,’ Tiltman concluded: “That’s too simple a way to look at it. Retail is not dead. I think ‘B quality’ retail is dead. But that’s something that’s been happening for years and years. We own Simon Property Group from the US, which is just stand-out retail with a huge amount of leisure and Food & Beverage component in their centres, and they continue to do well.”