In the late 1990s, when professionals from the European listed real estate market came together at conferences, they would discuss with no little envy the huge growth of the US REIT market over the decade, aided by its own association, NAREIT. According to Nick van Ommen, chief executive of the European Public Real Estate Association (EPRA), NAREIT in the US wasn’t so much a blueprint for the European association as the goal to aim for.
“They had phenomenal success with the organisation in creating the REIT industry in the US. In 1990, the REITS market was worth $7-8bn and 10 years later it was a $170bn industry, so it grew by 20 times and that was absolutely due to the tax-transparent structure they had in place and the work that NAREIT did to really promote that to the investor base. Seeing that success, people in Europe were saying we need some kind of organisation such as NAREIT in the US.”
In September 1999, a party of industry professionals finally convened at a conference in Italy prepared to put money on the table to turn talk into action and start up EPRA.
“This group included people like Patrick Sumner [director of European property at Henderson Global_Investors], Jan Willem de Geus [executive director at Morgan Stanley Real Estate Investment_Management], Jon Zehner managing director at JP_Morgan, Rob La Fors [managing director at LaSalle Investment Management in the_Netherlands] and Ronald Spinney chairman of_Hammerson – a good mix of companies, investors and fund managers.”
They decided to put money in and each convince organisations from their own peer groups to join. They also agreed to find a young person to start up the association and then to hire a seasoned CEO, which is when van Ommen stepped on board.
Today EPRA has 140 member companies, half of them real estate companies. It also includes some of Europe’s largest pension funds and is aiming to have 150 members by the end of 2004.
Significantly, van Ommen notes he was something of an outsider to the real estate industry, having in previous incarnations worked as managing director at private equity firm Euroventures and launched the Dutch arm of Flemings. He was also on the cusp of retiring before being offered the CEO position at EPRA: “I looked at the industry to see what my expectations were for the coming 10 years and I came to the conclusion that some dramatic changes were on the way and that it would be highly interesting to be involved with that.”
Things moved quickly and by 12 October 1999 EPRA was signed into the chamber of commerce in Amsterdam, with the Netherlands being seen as neutral ground, a hub for international travel and home to one of Europe’s largest pensions markets with a well established real estate sector. A month later EPRA had its inaugural conference in Barcelona.
Van Ommen explains that upon joining EPRA he outlined his belief to the board that while it was an association in name it should be run as a company with a mission statement and the strategy put in place to achieve this.
The mission statement was kept simple and to the point: “To promote, develop and represent the European public real estate sector.”
The organisation then laid out its future objectives: to expand and unite the public real estate sector, improve investor information, promote common and workable standards and create a focused and effective forum for discussion. To this end, four working committees were created – for information, best practice, regulatory issues and events.
Van Ommen explains: “The US market is very different, it’s one language, one accounting system, one currency, whereas in Europe everything is different. Therefore we didn’t want to create a head office like NAREIT in the US. We wanted to box clever and ask our members to be active in these working committees that would provide the products and services.
“If you look at Europe before, it was fragmented. Everyone did their own thing and there was almost no commonality between countries, and they almost did not communicate. EPRA is now there for its members and every year prior to the annual conference we ask them what we need to do for them in the coming two years. The list of priorities, however, has not changed much in the last few years.”
Where possible EPRA has sought to delegate within these working committees to smaller, more focused groups. The information committee, chaired by Patrick Sumner of Hendersons, is subdivided into three, with an index committee each for the US, Asia and Europe, a website committee and an academic circle. The latter comprises 10 of the leading universities around the world invited to become members of EPRA on an exclusive basis and to carry out research that will push the sector forward.
One such study that was well received was on the diversification benefits of public real estate carried out by Graeme Newell of the University of Sydney. Newell’s research is now being extended to a global survey headed by John Glascock of Cambridge University.
This is the kind of area where van Ommen believes EPRA can reach out more to institutional investors. “The conclusion of that research was that if you add quoted real estate to a well balanced equity portfolio in the range of 10, 20 or 30% then it increases return and diminishes the risk. A lot of big institutions have used that as an alibi for their investment committees to increase allocations to quoted real estate. The funding for this research came from us and Graeme Newell is independent and a well-known professor from the University of Sydney real estate faculty.”
A further initiative is a workshop on ALM studies for institutional investors, where van Ommen says there will be discussion on the benefits of investing in quoted real estate. This, he says, has been prompted by the quandary that while ALM studies suggest pension fund should invest 20–30% in real estate – direct, quoted or unquoted – the reality is that allocations are nowhere near this level. “In the US average pension fund allocations to real estate are below 3%. In Europe, with the exception of Dutch pension funds and maybe some of the UK pension funds, others have almost no exposure to real estate!”
Asked why he believes this is so, van Ommen replies: “The funny thing is that it’s a mixed bag of reasons. The image of real estate is still not good in some areas, but we are representing quoted companies with true professionals working for them.
“You would be amazed by how much the CFOs and CEOs of real estate companies are willing to disclose today. I dare say there are other sectors that could learn a lesson from the openness of the quoted real estate sector. Investors know that real estate is an asset class that they can’t ignore and that it is well managed, but they still have to convince their directors.”
To meet this challenge and to look at increasing individual investment in real estate, EPRA has set up a new committee to broaden the investor base, with Jon Zehner as chairman.
“The idea behind it is that we have made inroads into the institutional world. There is still a lot of ground to be covered, but we are known there. However, if you look at private individuals, people know very little about how to invest money into quoted real estate.”
The association is also attempting to reduce the disparity between the quoted real estate market in Europe, the US and Asia. “If you look at Europe in this area it is lagging behind the two other major geographic segments, the US and Asia. The best example of this is if you look at the EPRA/NAREIT global real estate index. The market cap of the US is 50%, Asia is 30% and Europe is 20%. Now if GDP is a good indicator for the industry then between the US and Europe this is almost equal – so why shouldn’t they be the same?”
The index started life as the EPRA Europe index, but van Ommen says investor demand for a broader world exposure led to the extension to a global benchmark. “I was reluctant to do this at first because my brief is Europe. But the investors are global, so we felt that if we made it global then we would attract investors from the US and Asia.”
The index, which is jointly owned by EPRA, NAREIT and Euronext, the benchmark host, has become the leading real estate index in the world, according to van Ommen. “It brings new money to the sector and is a perfect vehicle for institutional investors to benchmark or track money against the index. In the last couple of years billions of euros of fresh money have come into the market place.”
Van Ommen predicts this will accelerate further with the introduction of exchange-traded funds (ETFs) to the index. The first in Europe, initiated by AXA with Morgan Stanley, Goldman Sachs and Merrill Lynch as market makers, have recently launched.
“The ETF is the perfect vehicle for institutional investors and fund managers to allocate large sums of money to the marketplace for longer or shorter periods. AXA is now in the book-building phase for the ETF and there has been phenomenal interest. What will be coming, hopefully before the end of the year, is the US section for the ETF, which has become real time/online. We are now speaking to parties to introduce an ETF on the US section of the index and we hope to have that in place before the end of the year.”
He says EPRA is also pushing Euronext to put the Asian section of the index into a real time/online situation. “We are saying to Euronext that this needs to be done next year. The bottleneck is just to change people and systems to a 24-hour business.”
Three independent committees (of eight to 10 members) in the regions meet each quarter to judge (the ground rules for the index can be downloaded from the EPRA website) which companies should be included or excluded from the index.
Van Ommen says this transparency is important because investors want the reassurance of open and objective criteria. “The quality and continuity of the information is also really good. Finally, it is neutral. If you take any other index in the world for real estate they either belong to a bank or someone else, but they are not independent like us. This is why it has been such a success.”
Another area where EPRA has made great strides is in transparency initiatives for the industry; specifically in launching a guide for best practice: “This has become the bible of companies in this area and is seen as such an important document that PGGM came to us and asked whether they could sponsor an award for the company that comes closest to implementation.
“Pension fund managers and institutional fund managers are now asking companies whether they follow the EPRA best practice standards. And all companies as a result of IFRS [International Financial Reporting_Standards] are looking at these standards because they adhere to IFRS.”
Van Ommen adds that the International Accounting Standards Board in London has said it sees EPRA as the voice for the European quoted real estate sector. “They have told us that they are willing to sit down and talk with us to make some of their standards more real estate-specific. That’s really good for the industry because there was no real standardisation of reporting beforehand.”
As an example of how successful EPRA has become, Van Ommen points to the 500,000 hits every month on its website. “This is people looking for specific information who go to our membership lists and to the statistical bulletins.”
The association also runs awards for areas such as performance as well as regular real estate investment workshops with the members.
Another of the major roles of EPRA, however, is as a lobby group for the sector. Recently, the association’s regulatory liaison committee advised the UK Treasury on the proposed PIF vehicle using its experience of the Dutch FBO REIT style property fund structure.
More serious, says Van Ommen, has been a successful challenge to German law on tax barriers to real estate investment. “In Germany there is a tax law in place that is in clear violation with EU law for real estate. If you’re a German investor and you want to buy British Land you are penalised on the dividend income and you are taxed on unrealised capital gains. This hampers free capital flow and is in clear violation of EU law. We started litigation together with NAREIT and took a leading law firm in Munich and the law will be changed in the summer retrospectively from 1 January this year. Wherever it is necessary we do this work for the sector.”
EPRA has three categories of membership. Full membership is for companies, investment banks, fund managers and analysts and includes full voting rights for a fee of e10,000 a year. Associate member status is designed for accountants and surveyors. These have no voting rights and pay e7,500 a year. Academics and universities (organisations not individuals are permitted to become members) pay a reduced membership rate of e1,000.
“All members have the same benefits, but it is the full members who will decide where the quoted sector will go.”
Van Ommen himself is governed by a management board of 25, which splits down to a smaller executive board of nine. “The management board is the decision-making body and 60% of their members should be CEOs of real estate companies, so it is the real estate companies that have the final say.”
In terms of future plans, the EPRA CEO says that expansion of an EPRA-type organisation in Asia is already gaining momentum: “I spoke in Australia last year where I introduced the case for starting the Asian Property Real Estate Association – APREA.
“I think it will come but they will have the same difficult path to go through as we did in Europe – they have to find the same group of partners to resource the organisation. EPRA and NAREIT will be very supportive of this though and I think there’s a good chance that early next year APREA could start in Asia. I think the home base of APREA should be in Hong Kong, close to China, because that is where I think the real development will take place in the coming years.”
EPRA has also recently updated the survey by its tax committee on tax transparent structures, which was first published at EPRA’s annual conference in Madrid in 2003 and updated to a global version and presented in London at the ULI conference in June. Such endeavours brought about by the quoted real estate sector as a whole represent the value of EPRA, as van Ommen concludes: “The beauty of EPRA is that we can pull together these professionals to work on such projects, because in the end they can see that we will all benefit from it.”