“Absolutely delighted to be back in person” was the opening line from Dominique Moerenhout (EPRA CEO) at the start of this year’s event, and it suitably summed up the mood of the attendees. The buzz and in-person interaction were noticeable, with many participants not having seen each other since April 2019, when the event was last held in person.
Roger Bootle, Chairman of Capital Economics, kicked off the morning content with a swift if sombre run-through of the macro projections for the UK and the Eurozone for the next two years. Unsurprisingly, the major themes were inflation, Ukraine, interest rates and supply chain issues. One of his most interesting comments came towards the end when he took us back to the future and referenced monetarism and Milton Friedman: “Inflation is always and everywhere a monetary phenomenon”. Nevertheless, his conclusion was that the “institutional architecture” is nothing like the 1970s and that likely real wages growth will outstrip CPI by late 2023 with inflation dropping back to 3-4%.
In the CEO panel response, Giacomo Balzarini, Margaret Sweeney and Evert-Jan Garderen all agreed that whilst their local markets were tough, with supply chain issues hampering new development – and “just-in-case being the new just-in-time” – they were well protected by indexation and were unlikely to see government intervention in the rental markets. Margaret Sweeney outlined the growing threat of delays in supply chains for IRES' development pipeline and the knock on effect this is having in terms of inflation in construction costs.
An eagerly anticipated panel followed, discussing LTV and the new EPRA LTV metric. Nick Sanderson from Great Portland Estates (LTV 20.5%) argued that low leverage at this point in the cycle allowed them to be opportunistic, and they have the flexibility to raise LTV to 30% so they can deploy capital quickly and increase LTV for the right opportunity. Els Vervaecke from Montea (LTV 38.6%) argued that whilst five years ago their LTV was over 50%, they have been able to reduce it whilst also growing the portfolio through recycling assets. Simon Robson-Brown from Morgan Stanley, one of the EPRA LTV committee members, passionately defended the new metric arguing it gave investors a clearer and transparent overview of companies’ leverage and risk on equity. Nevertheless, the takeaway all agreed that leverage was lower and debt had longer maturity with fixed rates meaning “it was different this time”.
No summit can be complete without ESG, and the afternoon started with a panel on sustainable finance. Greenwashing and regulation were the key topics with Jana Sehnalova, Conduit Asset Management, said that while “for once, Europe is doing a better job than other jurisdictions”, and the EU Taxonomy, whilst not perfect, is putting pressure on companies. Timon Drakesmith pointed out that listed companies were at the forefront of addressing the issues but makeup only 7% of the built environment. Nicolas Dutreuil, Gecina, welcomed the Taxonomy on the basis that they are already nearly compliant, and it gives investor comparability across all industries, not just real estate.
The summit closed with a panel discussing the public to private trajectory with Olivier Elamine from alstria (whose recent acquisition by Brookfield gave him a perfect judgement), Matt Norris from Gravis Capital and James Seppala of Blackstone. James and Matt both agreed that it is not just the assets that the world of private equity is attracted to but the management teams as well. They provide world-class real estate knowledge, especially as the industry is so capital intensive and will be more so due to ESG etc.; the quality of how and when to deploy capital that these teams bring is highly regarded. Olivier argued that it was largely due to capital that it made sense for alstria and its shareholders to accept Brookfield’s offer. Access to capital is increasingly difficult post-pandemic when many companies are trading at discounts, and being cut off from capital at this point in the cycle made no sense. Ultimately, there is more tolerance for risk in the private market. For Matt Norris, it was about mega-trends such as e-commerce and greying populations that are driving their decisions, and the REIT space is very good for accessing high-quality alternative assets. Taking one example, he explained that student accommodation is more likely to have en-suite bathrooms than elderly accommodation and, thus, there is massive room for investment. To conclude, all three agreed there was too much focus on NAVs and discounts in Europe, and this was a drag on raising capital and growing the sector.