Europe’s Buoyant Property Markets Help Hide Executives’ Failings

(Bloomberg) -- A lot of real estate executives in Europe are doing nothing to add value to their firms, and buoyant property markets are helping to hide their failings.

The managers of about 40% of European real estate investment trusts have failed to take action that enhanced their companies’ returns over the past three years, according to a report by research firm Green Street Advisors. The management team at Intu Properties Plc, whose shares have plunged 68% this year, placed last in the study. Barcelona-based Inmobiliaria Colonial Socimi SA earned the highest grade.

The ranking filters out property price changes, which are largely outside management control and can affect metrics like shareholder return. It focuses instead on how executives managed their balance sheets and allocated capital, highlighting companies that outperformed regardless of the hand they were dealt.

“Total shareholder returns convey a lot of information about managerial performance,” Green Street analysts including Peter Papadakos wrote in the report published on Thursday. “But returns are primarily influenced by whether a given REIT happened to own the right type of real estate in the right location.”

Low interest rates and swollen central bank balance sheets have driven waves of capital into European real estate during the past decade, pushing up prices. At the same time, the rise of e-commerce rewarded warehouse owners while punishing mall landlords. These developments can obscure the relative effectiveness of the executives running REITs.

Land Securities Group Plc ranked top over a five-year period, according to Green Street’s analysis, highlighting how some companies have managed to outperform despite facing the twin challenges of Brexit and the U.K.’s retail crisis.

Companies that borrowed heavily and were subsequently forced to raise capital right after the financial crisis typically rank among the weakest in Green Street’s analysis of so-called Management Value Added in 42 REITs over the long term.

“Some European REITs have learned the lessons from that experience, although a surprisingly high number still employ leverage that exceeds the norms that prevailed” in the run-up to the crash, Papadakos wrote.

--With assistance from Lucca de Paoli.

To contact the reporter on this story: Jack Sidders in London at jsidders@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry, Lucca de Paoli

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