The European (including UK) listed real estate sector continues to shrink, even as its US counterpart has grown in scale and influence. This contrast raises a familiar question: why hasn’t the European market developed in the same way? The standard explanations are well known.
The US benefits from structural advantages — a unified REIT regime, one legal framework, a common language, and a single capital market. Europe, by contrast, remains fragmented. Another often-cited issue is the obsession with Net Asset Value (NAV), with many European companies reluctant to raise equity below NAV – even when doing so could create long-term value.
In my view, the real issue is simpler, and more fundamental: not enough companies in the European listed real estate sector focus on shareholder value creation. This is one of the central themes in my book, Real Estate Rules, published earlier this year. Too many listed property companies in Europe have destroyed value – often through excessive leverage, poor capital allocation, or weak shareholder alignment. The recent high-profile collapses of Adler Group and SBB serve as painful reminders. Why would investors allocate capital to a sector where they’ve been burned before?
To earn (back) investor trust and capital, management teams must relentlessly focus on two things: continuous company optimisation and active value creation. Optimisation means efficient capital allocation, a low-cost structure, and a robust balance sheet. Value creation means sweating assets, executing a clear growth strategy, engaging in development or refurbishment, and where appropriate, participating in M&A. In short, management teams must fire on all cylinders.
Of course, there are some great companies in the European listed real estate space – and thankfully, there has been real progress in recent years. UK-listed companies have generally learned from past mistakes – notably those that raised equity at the bottom of the global financial crisis in 2009. But too many others still don’t get it. Some remain passive. Others appear paralysed. It’s no wonder private equity is circling the sector: many listed companies are trading well below intrinsic value, and too few are taking action.
Why not pursue strategic M&A or take a stake in an undervalued peer? Why not raise equity – even below NAV – if it enhances long-term earnings? British Land did just that, acquiring a retail park portfolio that boosts recurring income, despite issuing shares below book value. That’s a bold move – and exactly the kind of thinking the sector needs.
There are other encouraging signs. LondonMetric has been a standout in the M&A space, while Primary Health Properties recently made a counteroffer for Assura. Aedifica is targeting a team-up with Cofinimmo. These are examples of companies that are playing offence, not defence.
Boards also have a critical role to play. They must ensure that management teams are properly aligned with shareholders – not just through remuneration structures, but also in mindset and ambition. No investor minds paying for strong performance. But they do mind paying for mediocrity. Boards must be quicker to act when CEOs underdeliver, including replacing them or exploring strategic alternatives like a sale or even liquidation.
Because here’s the reality: if a company fails to create value for shareholders, it will lose relevance. It will trade at a discount, be unable to raise capital, and find itself stuck. And eventually, someone else – typically private equity – will step in to resolve the situation.
The equity market is unforgiving. It operates on a simple principle: if in doubt, throw it out. We cannot allow poor performers to drag down the sector’s credibility. Yes, I want the listed real estate sector to grow. But not at any cost. If a company consistently destroys value, action should be taken.
For the sector to thrive, value creation must be non-negotiable. It’s time for the value destroyers in the listed space to step up – or step aside.
This article was originally published in The Property Chronicle Summer Issue.
