Episode Transcript
Dominique Moerenhout : I would say the whole sector, also, just look at your iPhone. You need data centers for the cloud. If you say you want to use more technology tomorrow, you also need data centers. You need the cell towers. So that's the beauty of the real estate sector is that it touches, I would say, all the big evolutions we see in society.
David Sol : Welcome to FTSE Russell Convenes. I'm David Sol and in this session we're talking about real estate market post-Covid and how we live and work differently. And for that, I have a special guest, Dominique Moerenhout. You're the CEO of EPRA, the European Real Estate Association. Welcome. Can you tell me a bit about yourself and what ERPA does?
Dominique Moerenhout : So I've been, for eight years the Chief Executive of EPRA. So EPRA is European Public Real Estate Association. And so we are, I would say, the trade body covering the entire listed real estate sector, for Europe, property companies on the one side, but also all the investors and the other stakeholders, active, in this domain and also very important in this particular context.
Yeah. So we've been, 20 years, partners with, FTSE Russell. Together with NARIET which is our sister association covering the US REITS market, managing together as the three partners, the largest global listed real estate index in the world.
David Sol : And that's great. Now let's talk a bit about listed and physical. The bricks and mortar. What's actually the difference between the listed real estate and just traditional physical buildings?
Dominique Moerenhout : I would say the major difference between public markets versus the, private market is, first of all, the fact that it's much more liquid. So investing in the in the listed real estate companies is, by nature, the only way to invest in the liquid investment, which itself invest in assets which are totally liquid. So a bulls, public real estate market and a private real estate, are I would say an important attribute in every single large global, real estate investor.
Prior to joining EPRA, I spent the 15 years in the private real estate fund management business. So I would never say that private is worse than the listed. But listed has a lot of advantages compared to the to the private markets in terms of liquidity, in terms of transparency, in terms of getting access to the public markets, when the companies need to go, either for new equity issuances or that the issuance is is much more, rapid and much quicker than in the private real estate markets.
But all in all, listed and unlisted, public and private, in the medium to long term are all the same. But what is important for a global investors, which by definition they have been much more active on the private real estate market over the last 20 to 25 years is very important. Those investors, understand perfectly the attributes of increasing their, strategic or tactical asset allocation in the public markets.
David Sol : So it's a tool for international investors to allocate to real estate in a liquid format. Can you talk a bit about, Covid, what happened after Covid? We had a period, of course, 2021 was working from home. And over the last couple of years, you have this hybrid way of working from home and maybe, working in an office. What are you seeing? Not only in Europe, but in United States and in Asia. How are these trends happening?
Dominique Moerenhout : So it's clear that the we have seen different approach to the the wORK from whole phenomenon in many parts of the world. Europe, which we are covering, people came back immediately to the office, probably more in the south and the northern part of the, of the, of Europe, where today probably most of the, the workforce is between 4 to 5 days a week in the office.
We saw a big difference also with the London market, where people are also back to the office. But it took much longer for the London based or UK based companies to bring their, kind of back on a more permanent basis. In the office. My view on this work from home, is it due to stay? Probably it will stay.
I think it's it's probably a good way of keeping a good balance between, private and professional life, especially in specific functions, but that remain convinced that the bulk of the people should be on a permanent basis in the office. Because people of course, when you work from home, you're far away, from your colleagues. I would say the exchange of communication.
I would say the IDs generation. This is not something you do, via a teams meeting or a zoom meeting. So people that definitely need to be, sitting together, especially in, I would say, sales functions, especially more the front office functions or specific functions in the companies might personal opinion about it is that the companies which have enforced, I would say a deep work from home policy will regret it in a few years because especially I see that in many countries in the world where the younger population, they can't learn from their colleagues if they walk two, three, four, five days a week from home, they they need to be sitting together.
And that's also the trend we have seen everywhere, across Europe. The US was a little bit behind it. Especially, people, going to New York, I can tell you a few years ago, two years ago, if I wanted to meet with investors in New York City, getting an investors meeting on the Monday, on the Friday was quasi mission impossible.
Today is possible. So people are back. But the probably in the cities where the commuting time is longer might see a higher proportion of work from home than in the cities where I would say traffic, or I would say, connecting between office and home is is not the issue in Asia. I was in Asia together with the Footsie Russell colleagues and they reached, two weeks ago.
We didn't have any issues in getting investors meetings, even on the Friday. Just to give you an anecdote. So we were in Tokyo, two weeks ago, and on the Friday we had two, six meetings. And we headed to the last the last meeting at 5:30 p.m. on the Friday afternoon, which is probably more complicated to get in London, I would say, as a summary, I would say work from home is something we might see, but I would personally encourage, I would say, companies to limit it.
Visiting. My daughter is 21, she just finishing the university right now, but she told me work from home is not for me. I want to be there with the colleagues. I want to learn for the both senior people and for me being five days a week. In the office is something I want to do. And I'm sure a lot of the younger generation, has the same opinion.
David Sol : I would agree with that. Yes. You mentioned the partnership FTSE and EPRA, NAREIT, of course, is a very important partnership. We have the FTSE EPRA NAREIT Index Series, which is really the bellwether of the listed real estate markets.
Dominique Moerenhout : Clearly. Yeah.
David Sol : And you of course analyze also the subsectors in, within the hotels, commercial other sectors. I know you presented recently and you spoke about the five megatrends. Can you talk about those five megatrends.
Dominique Moerenhout : So maybe before moving the five megatrends, talking about about the index, it's clear together with the the FTSE Russell colleagues and NAREIT. So we are every year traveling throughout the world, I would say, to bear the torch of the listed real estate sector and more importantly, for us to to make the the very few investors who still not use the FTSE EPRA NARIET Index Series to convince them that is the best index of the world. Just to give you an idea to the, the FTSE EPRA NAREIT Index Series, is a benchmark by over 320 billion US Dollars in the world, which makes it by far the largest global listed real estate index used by all the big managers in the world. There are some areas in the world I was talking about Japan, where I think there is a huge growth opportunity, for, I would say, promoting even more.
The index is something we will be tackling as partners, in the, in the months and the years to come. So clearly, yes, when we meet with investors and of course we have a neutral position vis-a-vis the market. Everywhere I go, if I come here in the US, I go to Asia, we travel throughout Europe. Everybody, I would say speaks about the index.
I do want to speak about the some competing indexes, but we know that the other ones probably have around 20% of the same assets, tracking the index. So we see where the difference is. And I think this this 20 is partnership. So we are celebrating 20 years partnership between the three partners. This year is something which is remarkably appreciated by the investors community globally.
Coming back on your second part of your question about, the megatrends, I like to speak today about what I called SISSI is. No, I'm not talking about the princess here. I'm just talking about the five megatrends we see in the market. So I would start with, specialization and all those trends, more or less.
We can see them across Europe, but in the US and also in Asia. So specialization what do I mean by this is that we have seen over the many years more and more listed real estate companies a famous REIT, being more specialized, becoming more pure players in one specific domain. If I think about a Europe, for example, if I look at the total market cap 15 years ago, over 50% of the European market cap was composed of diversity five companies.
So that means companies investing in multiple sector. So a company investing for example in offices, logistics and residential all together. So we have seen this portion of diversified companies diminishing tremendously over the last 15 years. Just an idea today about Europe, just around 30% of the total market cap or diversified companies versus 50%, probably around 15 years ago.
So that's the first trend we see. The second one, which we see probably a bit more in Europe today, is the internationalization of the REIT sector. So that means having a reach which is domiciled in country A, investing in country A, B, C, D, E, F, and G. So companies going more and more towards a broader investment community, instead of being only focusing on the country where the REIT is, is domiciled.
Third big trend we see is scale. And this is something we see within the asset management community, but also something we see in the REIT sector is companies are becoming bigger and bigger and this is also what investors are looking for today. So what does an investor in the listed REIT want to get? It wants to get an easy access in the company and the company which in which it can easily invest which also brings a certain liquidity.
So of course the the REITs which have a smaller I would say market capitalization, I would say do not get I would say traction from the largest investors. So we see a certain, I would say scalability, a certain consolidation in our industry. I was a bit, I would say in interrogated by questions that we received a few months ago by investors saying, yeah, but a lot of those smaller companies and via the consolidation in the listed space goes more and more towards the private market.
And just just to give you a few figures about to Europe, if we look at the, M&A activity over the last five years across Europe, 60% of the M&A were public to public transactions. So a public company taking over another public company and only 40% of the transactions were public to private transactions. So that's just from a number of small.
But if you look at the volume so the market cap will do those transactions today in Europe, 80% of the volume of those transactions were public to public; versus public to private. So when people tell me that a lot of those companies will disappear from the spectrum, this is completely wrong. People are wrong about it. But it's clear that consolidation will remain a trend.
We will continue to see probably in the next 12 to 36 months across, the industry for big trends is sustainability. I think sustainability is probably the only area where Europe has been more advanced compared to the other parts of the world. That is, there is one area that's probably, the one sustainability is not a new phenomenon, as sustainability has been on the map for over 15 years in Europe, primarily driven by, the Dutch investment community. And it has percolated of across the, the industry.
David Sol : And just to be clear, sustainability refers to the carbon footprint embedded in the building material.
Dominique Moerenhout : Yeah, I would say sustainability covers multiple factors. Right. We can go we can cover I would say the environmental aspect. It can cover social aspects. It can cover also governance. So sustainability is clearly something which is here to stay. But of course we also see a changing, a paradigm, inside sustainability because we start seeing in some parts of the world investors, pushing back a little bit on sustainability, whilst in other areas, I would say the regulatory framework, if I speak about Europe today, the regulatory framework probably has been too developed, which has also created some, I would say burdens for the companies in particular about reporting burdens.
I think probably in Europe, I would say Europe will be overshoot, in its own, feet over the last ten years. So, no, they tend to I would say to, to, to clean the little bit the regulation to make a little bit easier. But sustainability is something which is here to stay. But today the big focus is of course about the decarbonization of the sector and about, all the initiatives which are being taken. Sustainability needs to have a social attribute.
A few years ago, you could hear investors saying it's a little bit sustainability at any price. Today is we focus on impact, and we want to make sure that all the sustainability initiatives we are taking are earnings accretive. So we could see also a shift from that point of view. But sustainability remains on the top of the agenda.
Last big trend we have seen is innovation. So in the vision is clearly we talk about innovation. We can talk about the proptech is something which is also like sustainability on the top of the agenda of every single. To see you in the world. This has also an impact on the specialization or the new sectors we see coming on the industry, because innovation also leads to more demand for data centers.
Data centers is something which we didn't talk about many years ago. Data center companies have, I would say, increase the number, increase in size.
David Sol : Play the data centers we need them for AI, for training of Models or for for the cloud?
Dominique Moerenhout : So this has a big impact. And also this innovation also has an impact in the logistics sector as an impact in the cell towers sector, etc.. And just to give you an idea for us in Europe today, there's new sectors which are driven by innovation represents 11% of the FTSE up on the NAREIT developed Europe index.
And we tend to believe that it will increase up to 26 to 27% in the next eight years, in the FTSE EPRA NAREIT Europe index. So this is also a big mega trend we are seeing. So we talk about specialization, internationalization, scale sustainability and innovation.
David Sol : So interesting trends. Of course one of the big changes this years have been around geopolitics. 2024 was a record year in terms of elections. Very important election we've had of course, was in the US and the Trump administration announced tariffs. There's a lot of talk around tariffs, how a tariffs impacting the real estate, the listed real estate market.
Dominique Moerenhout : I would say there is no direct impact of the tariff on the listed real estate sector. But we need to keep a very close eye on what's happening, because it might have an indirect impact in some countries of the world. Some people speak about potential recession. [It] can have an impact on the number of square meters of the companies might need in the future, might have an impact in the way people shop.
People might want to go for more savings. So shopping a little bit less, which could have an impact on the retail sector, which could also have an impact if there is less consumption and it serves an impact on the logistics sector. If you want to save more, probably you will travel less, so you might use less hotels, etc..
So I would say there is no direct impact, but the indirect impact of the trade, the tariff discussion is, something we continuously look at and we keep obviously a very close eye on this aspect because this might or could affect the one or the other sector.
David Sol : So you really are following consumer behavior across the world's hotels, retail shopping.
Dominique Moerenhout : You see that's the beauty of the real estate sector because it touches all the things you do in your day to day life. If you work, you need an office, you have a shop, you want to go shopping, you need physical brick and mortar. You have a house. You need the logic. You buy the work more. You need to have the the required space, etc. I would say the sector also just look at your iPhone, your iPhone.
You need data centers for the cloud. If you say you want to use more technology tomorrow, you also need data centers. You need the cell towers. So that's the beauty of the real estate sector is that it touches, I would say, all the big evolutions we see in society. We speak about urbanization. We can speak about aging population.
I didn't speak about the health scare. We speak about, an increasing number of students everywhere in the world. Student housing is also a big sector, which was probably not really looked at 15 years ago. But it's, much more, I would say, part of the, what investors are looking at today. So the real estate sector is, to my opinion, because of course, I represent the real estate sector is probably one of the very few sectors which touches every aspect of your day to day lives.
David Sol : Touches all aspects of our lives. So we'll be keeping a close eye on the data, through the FTSE EPRA NAREIT series, and to see how the way we live, how we behave is changing over time. This is a fascinating discussion. Thank you very much, Dominique and we'll keep an eye together.
Dominique Moerenhout : Always great pleasure, David. Okay. Thanks for having me again. Thank you.
