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When Europe’s second-largest property company, Klépierre, announced in July that it was to acquire Dutch shopping mall landlord Corio, the deal was significant not just for the world of retail.
The Klépierre-Corio merger will create a pan-European chain of shopping centres, and give retailers co-ordinated exposure to the continent’s shoppers. It is the first time that property behemoth Unibail-Rodamco has had a competitor since it too was formed in a merger seven years ago.
Klépierre’s move is the first in an anticipated wave of consolidation in the European listed property sector. This could transform the current small-scale, fragmented marketplace into something more closely resembling the commercial real estate sector of the US.
In global terms, Europe’s publicly listed property industry is small. Just 6 per cent of European real estate is publicly owned, compared with 11 per cent in North America and 21 per cent in Asia-Pacific, according to the European Public Real Estate Association (EPRA), an industry body.
“The European listed market is underdeveloped,” notes Philip Charls, chief executive of EPRA. Analysts and investors have long argued that European firms must consolidate to create sufficient scale to become more appealing to investors in the listed sector. Klépierre’s move means that many other companies are now contemplating whether they too should seek acquisition.
It is no coincidence that Klépierre’s biggest shareholder, Simon Property Group, is also the largest shopping mall operator in the US. Simon shaped the US retail property market when it drove a two-decade-long period of acquisition and consolidation. It is an example of what a listed property sector can achieve.
The focus on retail landlords has intensified. “Shopping centres are the canary in the coal mine of listed real estate,” says John Lutzius, managing director of US-based analysts Green Street Advisors. “They benefit from scale and act as a clear portfolio of assets.”
What shopping centre owners are doing today, other parts of the European property industry may contemplate tomorrow, says Lutzius. One catalyst is the wider economy. The US listed sector emerged out of the savings and loan crisis of the late 1980s, helped by the evolution of real estate investment trusts. The crisis forced distressed US investors to shed property assets cheaply, making it possible for listed companies to grow rapidly. And Reits (introduced in the US in the 1960s and refined over subsequent decades) bring tax incentives and a dependable set of regulations, making them more attractive for investors.
In the aftermath of the financial downturn, Europe’s property industry faces a similar opportunity, says Lutzius: “We know listed real estate has been successful in both the US and Asia, and we think it will be in Europe too.”
Investor demand is also driving initial public offerings. With interest rates around the world at historic lows, many of the largest investors are struggling to find decent yields. Real estate is one of the few sectors where a 6 per cent yield is considered normal, not ambitious.
“Big global institutional investors such as Norwegian sovereign wealth fund Norges are increasing their exposure to real estate, and if these conglomerates want to invest huge amounts then they need to use the listed markets,” says Charls.
The first signs of growth in the European listed sector are emerging, as many of the biggest companies are choosing to specialise in particular subsectors of the market. European countries are also adopting Reit regimes: Spain introduced one in 2009, Ireland last year, and last month Italy announced its own plans. As a result, there has been a flood of IPO activity, first in Ireland and then, earlier this year, in Spain. “Within the next year we should see a much bigger Italian market,” Charls predicts.
And EPRA forecasts that European companies will grow to 18 per cent of the world’s total listed market in the next two years, up from 15.7 per cent today.
Europe is still held back, however, by domestic institutional investors; most major players come from the US or Asia. European institutions, by contrast, “haven’t embraced listed real estate”, says Lutzius. “For the sector to do well, we need to do better at convincing local investors that this is a good way for them to get exposure to property.”
Kate Allen is the FT’s property correspondent