Why Europe’s listed real estate companies need economies of scale

As new players enter the market and tenant needs continue to change, listed companies are finding that being bigger brings valuable benefits.

November 12, 2018

Size matters for Europe’s listed real estate sector. As new players enter the market and tenant needs continue to change, listed companies are finding that being bigger brings valuable benefits in today’s competitive environment.

Consolidation of major real estate companies in recent years has seen bigger players emerge from significant M&A activity. While deals as gargantuan as Unibail-Rodamco’s US$24.8 billion purchase of Westfield last year – creating the world’s largest owner of shopping centers – are a rarity, such mergers potentially provide a template for the future, says Robert Stassen, JLL head of European Capital Markets Research.

“There’s pressure on companies to reach a certain size and create economies of scale,” he says. “For a retail real estate specialist for example, size gives you the ability to negotiate with tenants across geographies.”

Unleashing capital flows

For listed real estate companies across all sectors, scaling up, says Stassen, means engaging with private real estate funds, which continue to raise capital.

More than €150 billion has been raised by 35 non-listed funds in the plus €2 billion fund range in the past four years. Capital is increasingly flowing through large, global fund managers, says Stassen, who points to the strength of the world’s 10 largest asset managers, which have added €7.2 trillion of AUM in the past four years.

“The growth in the asset management industry has been significant,” says Stassen. “If you believe REITs are a valid vehicle for global investors from a capital side, then that adds pressure to reach a certain scale.”

M&A is costly, says Stassen, but finding equity should not be difficult when globally there is no shortage of capital looking for a home. Some of that global capital will, from a client or shareholder side, see Europe as one market, Stassen says: “They will expect the same kind of quality and access, which few currently offer, to multiple locations.”

Compared to the U.S., Stassen says Europe’s listed sector is currently at a disadvantage when it comes to scalability.

“The average size of European REITs is much smaller than their North American and Asian counterparts,” he adds.

“The growth of Singaporean REITs is intensifying the search for cross-border REITs and more sizable investment options.”

Europe – and France in particular – has nevertheless seen strong M&A activity across its listed real estate sector, with French REIT Gecina adding a €6 billion property portfolio to its books in 2017 when it took control of listed peer Eurosic. Icade, meanwhile, has also boosted its portfolio, having taken over ANF Immobilier late last year. The deals were funded through bond issues and debt.

Scaling up, says Stassen, requires a significant injection of capital. Size, he says, does not come without complexity.

“You need to invest in IT, in people and in operating systems. Growing operationally means growing financially,” he says.

Looking at the operational side

Operationally, the wider real estate industry is, says Stassen, being asked “what does it want to be?”

“You can be a pure capital supplier and take the sale-and-leaseback route. Or do you want to become a company which not only operates the real estate, but also the business inside the building’s walls?”

Listed real estate companies – many of whom have specialized in a sole sector in recent years – are also grappling with a blurring of conventional boundaries between real estate uses.

“More mixed-use buildings are resulting in more districts with more diverse range of uses,” says Stassen. “Cities are changing from being defined into areas where we work, or where we sleep, or where we eat or shop, into much more blended environments.

“We may consequently see more mixed-use focused REITs – but first we’ll need to see them scale up.”

This less-definable blend, says Stassen, has seen the logistics and retail sectors step closer to each other, while the hotel industry’s sub-sector of serviced apartments is, says Stassen, a step closer to residential.

“No matter how big the company, these blurring lines raise questions, says Stassen. “Corporates have changed – but have listed real estate companies? It’s harder for them to predict the future.”

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