Oddly, it is a lack of competition in the real estate appraisal market that poses one of the greatest challenges for Vincent Bruyère, Senior Fund Manager at DPAM, speaking in February from a semi-locked-down Belgium.
The Brussels-based fund manager argues that a lack of appraisal options outside of the top five or six real estate consulting businesses allows a certain “naivety” in direct and private real estate valuations that artificially creates a real disadvantage for listed real estate strategies.
Bruyère, who has invested in listed real estate for institutional clients at DPAM for almost 15 years, loves the asset class. He, along with his senior team colleagues Olivier Hertoghe and Damien Marichal, oversee no fewer than ten institutional mandates that cover liquid real estate equities or, in some cases, combined real estate equities and bond strategies.
Valuation schedules that smooth returns are key to the appraisal debate, says Bruyère, particularly among larger institutional investors. Where liquid listed real estate is exposed to real-time price fluctuations on the stock market, the book value of other forms of real estate may only fluctuate once a quarter, or in some cases, only once a year. The underlying value and volatility of both forms of real estate could be the same, but real value fluctuations in unlisted real estate remain hidden much of the time.
“I personally think we should have many, many more appraisers in Europe that would make independent valuations,” says Bruyère. “There is little competition, and maybe that explains why, at the moment, we always see valuations that are very consistent,” even when the industry is riding out obvious market fluctuations.
If there is one criticism of the current system in Europe, it is “a lack of competition” which allows these naïve valuations. “Appraisers on the continent are too careful to take the hit,” Bruyère thinks they might not want to frustrate real estate companies who don’t like to see much volatility in their results.
In this sense, Bruyère believes that listed real estate market is always “right”. Prices are competitive, and so if there is a discount, it is being taken into account in the buy or sell price of a company’s shares. “Stock values will always adapt faster than physical valuation,” he says. “The benefit is that stocks might provide a buying or selling opportunity today that cannot be taken advantage of through other methods of real estate investment.”
What this means in practice, for example, is that retail stock values are currently pricing a discount between approximately 40%-60%. Bruyère and his team (and the wider market) expect retail rents and values to be down this year and next, accounting for the discount. Yet, they do not believe this will be reflected in physical valuations for another two years. The returns for big investors holding those physical assets, or equivalent, will look steady and smooth when, actually, the underlying picture could be one of extreme highs and lows.
“The markets are not naïve, and this can create opportunities for investors in real estate equities,” Bruyère says. “But do we need more competition amongst appraisers? Yes!”
Even with complications around valuation, Bruyère loves the listed real estate asset class. His interest in real estate investment began in physical property during his tenure as Chief Financial Officer of Curalia, the Belgian pharmacists’ pension fund. At the time, around 10% of the fund was dedicated to direct property, which was further constrained to Belgian real estate, but it was enough to spark a passion for the asset class that still runs strong today.
Now, Bruyère looks after far greater sums, yet is constrained only to liquid listed real estate that is readily available for purchase on the main markets because, he stresses, when investors want to access their capital, “it is important to be able to look them in the eye.”
The liquidity element of real estate equity investing has been central to Bruyère’s ethics as a fund manager for years, but it is particularly pertinent when considering the relative hype surrounding open-ended investment company structures advertising liquid access to property investments in recent times.
Yet, listed real estate strategies lack the popularity of direct and open-ended real estate strategies amongst institutional investors in Europe. Bruyère suggests that this is partly down to the size of the market.
“At present, one can diversify their listed real estate portfolio by market or by sector quite well,” he explains. With only a couple of euros, you may have a well-diversified exposure in listed real estate in different sub-sectors and in different countries. “But there are also gaps in what is available. Italy is the fourth-largest economy in Europe, and there are only three or four real estate equities available.”
Part of this is a cultural, human issue. “Physical real estate is important to people in Europe,” according to Bruyère. “For example, in Belgium where I live, people have an extremely strong relationship with physical property.”
But the bigger issue, Bruyère thinks, is the need for a unified REIT regime in Europe to allow for easy, multi-national diversification within European portfolios. He explains that Europe has a listed universe of about 250 companies that we could expect to broaden, deepen and grow under a single European REIT standard. “It is understandable that every country in Europe wants to keep its own fiscal regulations, but ideally, all the REIT regimes should work together in Europe.”
For now, at least, Bruyère is happy with the opportunities the European real estate equities afford him and his team. DPAM expertise is based on three key pillars: Active management, Sustainability and Research. “We put a lot of attention to the ESG side of each company, and we develop our own scorecards to assess the quality before engaging with the management of the companies.”