REITs value real estate more conservatively than developers

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Oct 12, 2019

The study reveals that real estate developers tend to show a systematic risk (beta) of more than 1.0, confirming their procyclicality to market movements, while REITs tend to be a more conservative investment less influenced by market movements. Given the same average expected returns, shareholders of development companies would historically have received relatively less, i.e. a lower risk-adjusted return, compared to REITs due to their higher risk profile. Prof. Dr. Roland Füss, Professor of Real Estate Finance at the University of St.Gallen and Gianluca Marcato, Professor of Finance and Real Estate at Henley Business School (University of Reading), are currently preparing a study to explore precisely this phenomenon by addressing the following questions:

  • Have developers been overcharged by debt providers, i.e. is the cost of debt too high?
  • May deleveraging lead to a significant decrease in the cost of debt funding, and thus, result in an increase in return on equity?
  • Does mispricing in standardized metrics exist? Are standardised metrics and models used for portfolio holders such as REITs directly applicable to developers’ valuation?

Furthermore, the study’s authors aim to identify best practice valuation guidelines for the capital markets that can ensure comparability in the valuation of real estate companies across business fields and sectors similar to the Best Practices Recommendations Guidelines of the European Public Real Estate Association (EPRA 2016).

“The same methods are currently used to assess the value of project developers and portfolio holders. Nevertheless, such a generalized approach, as well as the Best Practices Recommendations Guidelines of the European Public Real Estate Association (EPRA 2016), do not sufficiently address developer companies’ respective business models. Consus has commissioned the study to highlight the differences in valuation approaches and outcomes and to raise awareness of the need for more differentiated valuation criteria”, explains Andreas Steyer, CEO of Consus Real Estate AG, the leading real estate developer in Germany’s Top 9 cities.

“The aim of our study is to identify sector-specific risks and value drivers and to search for ‘Best Practice Valuation Guidelines’. For developers, the valuation should focus on ongoing business activities, which are not static as for standing assets of property holders. Growth in this respect also plays an important role in the valuation of real estate companies and especially developers. A useful valuation criterion for developers could be, for example, their enterprise value (market value plus net debt) to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple. Alternatively, a suitable indicator for the valuation of developers could be based on the revalued (or revised) net asset value as a sector-specific NAV, which records the change in the value of both the properties held and, in particular, the increase in the value of the properties to be developed”, explains Prof. Dr. Roland Füss from the University of St.Gallen, who began the panel discussion by presenting the study’s preliminary findings. The final results of the study are expected in March of next year.

The current debate on measuring the risk exposure of real estate developers is taking place against the backdrop of enormous demand for housing. By 2030, around 3.2 million new apartments will be needed in Germany, resulting in a potential total development volume of 1 trillion euros. By 2022 alone, 1.5 million residential units are planned.

The resulting challenge of financing this much-needed residential real estate was one of the topics under discussion at the RETHINK REAL ESTATE panel at EXPO REAL in Munich today. The panel included Prof. Dr. Kerstin Hennig, Head of EBS Real Estate Management Institute (REMI), Andreas Steyer and Susanne Schröter, Managing Director Capital Markets at Deutsche Bank, who presented a series of specific case studies to shed light on the problems of financing.

“Germany has slept through the urbanization trend. From an objective point of view, a German city like Frankfurt am Main lags far behind cities like Copenhagen or London in terms of efficient land use and densification. And especially in the residential real estate sector, there is often a lack of innovative and smart concepts”, said Prof. Dr. Hennig.
“From talking with our clients and investors, we know that an easy-to-understand valuation method would provide them with an invaluable decision-making tool as they consider potential investments in real estate development companies. In particular, investors are looking for a method that would let them compare valuations of different companies in the real estate industry”, Schröter confirms.

“Ultimately, the industry should orient itself to the model character of the EPRA when implementing the ‘Best Practice Valuation Guidelines’”, Steyer sums up. EPRA, an association of listed European real estate companies, has an important guideline function.

About Consus Real Estate AG

Consus Real Estate AG (“Consus”), headquartered in Berlin, is the leading real estate developer in Germany’s Top 9 cities. Consus Real Estate’s development portfolio had a gross development value (GDV) of EUR 10 billion as of 30 June 2019. Consus focuses on the development of entire neighborhoods (quartiers) and standardized apartments, which are sold to institutional investors in forwarding deals. In-house construction expertise and the capability to digitalize construction processes allow Consus to operate along the entire property development value chain. Consus manages and executes development projects from planning through construction to transfer of ownership, and provides property management and related services through its subsidiaries CG Gruppe AG and Consus Swiss Finance AG. Consus’s shares are listed in the Scale segment of the Frankfurt Stock Exchange, the m: access segment of the Munich Stock Exchange, and are also traded on XETRA in Frankfurt.

Articles authored by Martin Signer

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