Company-specific attributes drive listed real estate performance

Martin Haran

Martin Haran PhD is Professor of Real Estate and Urban Studies at Ulster University. He holds a First Class BA Hons in Business and Finance and a PhD in Property Investment. Martin has led a series of prestigious international real estate investment research commissions in real estate investment and finance.

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.
The ability to mitigate the risks and optimise opportunities relative to these key trends is, to a large extent, predicated on the responsiveness and innovative capacity afforded by the corporate structure and associated underpinning company specific attributes. Organisational foresight must be complemented by an agility and flexibility to transition at pace relative to market change and investor expectations. Our recent EPRA commissioned research highlighted the pertinence of company-specific attributes and sectoral diversification strategies to risk-adjusted performance within the listed real estate sector over the course of the last decade. It is centred on six key listed European real estate markets, namely France, Germany, Netherlands, Sweden, Switzerland and the United Kingdom[1] across the period 2007-2017 inclusive (Figure 1).
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.
Decomposition analysis was undertaken to further test the explanatory power of sector level and individual company level attributes (or group of attributes) and the extent to which they account for the variation of risk-adjusted return[2]. The analysis explored the explanatory power of the attributes over three sub-periods (2007-2017, 2007-2011, 2012-2017).
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.

[1] The results are based on 113 listed property companies all of whom were constituents of the EPRA indices over the time series. EPRA datasets were complimented with company level data from Bloomberg.
[2] The decomposition approach employs a “partial ” contribution to the models as advocated by Connor (1995). Method A: assessment of the coefficient of determination of a regression model with risk-adjusted return as the dependent. Method B: assessing the difference in the level of coefficient of determination between two regression models; 1 with all attributes as independent variables except the subject attribute(s); the other with all attributes as independent variables – the marginal increase in explanatory power through an additive approach which already includes all other regressors.