What is the future, if any, of the quoted property company? This question has taken on new urgency in the UK amid a rising clamour for companies that cannot deliver performance to wind up and distribute the proceeds to shareholders. Earlier this week, Nick Leslau, one of the UK's most respected property entrepreneurs, announced he would liquidate the portfolio of Prestbury, the company of which he is chairman, if he cannot find a way to narrow the discount to net asset value at which the shares trade.
Already, several large UK companies have committed themselves to share buyback programmes, taking the view that managements cannot justify paying 100p for £1 of real estate if its own can be had for 60p. And a growing number of US real estate investment trusts are showing equally dismal returns.
There are diverging schools of thought about why real estate company shares are faring so poorly and what managements should do about it.
Derek Wilson, chief executive of Slough Estates, the industrial and office development company, takes a relaxed view, saying: "The quoted sector is cyclical." Property, he points out, is doing no worse than over a dozen other "old economy" sectors. "Shareholders will come back," he argues. "They always do."
Mike Slade, managing director at Helical Bar, the quoted UK developer, argues that the tax position of companies versus that of direct property investments is making the quoted company an irrelevance.
"If, as is proven, they are tax inefficient and management inefficient, and in the face of FRS13 (the calculation of debt cancellation costs) ensuring that trading discounts are inevitable, we must conclude that market forces will, if they have not already, bypass (us) and force the quoted company as we know it to close down."
But is there any reason to believe that the model of an external company managing a pool of assets it does not own will deliver better returns than the current corporate model? Consider, for instance, the recent announcement from Rodamco Europe (RCE), that chief executive Jan de Kreij is to step down, as the result of "differing views" from those of the supervisory board of RCE's fund manager RoProperty. His replacement, albeit a temporary one, comes from the supervisory board of RoProperty.
Analysts recoiled at the news, particularly because RCE is in the middle of negotiating a possible merger with Amvest, a Dutch shopping mall and office property vehicle owned jointly by insurer Aegon and the Dutch pension fund PGGM.
"We think that the stepping-down of de Kreij, in the middle of the negotiating process with Amvest, is remarkable," wrote analysts at Kempen & Co, the independent Dutch stockbroker.
Arjan Knibbe, property analyst at Kempen, points out that since the announcement, RCE's shares have fallen 10 per cent against the broader market's 2 per cent decline. Meanwhile, analysts at ABN Amro were even more pointed in their criticism. "In our view," wrote Jeppe de Boer, "RCE can ill afford to lose the man who was leading RCE's push to become one of Europe's leading retail real estate operators. Therefore we downgrade the stock from buy to overvalued."
At the heart of the problem, analysts say, lies the uneasy relationship between Rodamco's demerged companies - including RCE - and the fund management arm. Rodamco was demerged into four separate geographical companies last June but, analysts say, never fully escaped its legacy as a property fund. It retained a complex structure in which the four companies retained a separate unit, Rodamco Property Management, as the external fund manager for the assets. RoProperty, in turn, has a five-year contract and is remunerated based on the value of each company's underlying assets.
RoProperty and RCE have remained silent on the reasons for Mr de Kreij's departure. However, analysts at ABN Amro offer some thoughts. RCE had recently acquired the Swedish property company, Piren, and indicated its intention to retain its management. As a result, Mr de Kreij had argued that RoProperty should not be entitled to receive the full management fee in respect of the Piren assets, they say. With a merger with Amvest imminent, and even more management likely to be injected into RCE, the issue of fee sharing must have been even more pressing.
The issue raised by management changes at RCE has wide-ranging implications.
At the heart of the matter, says Mr Knibbe, is that they are unlikely to deliver returns for shareholders if management interests are not aligned with those of shareholders. And there is no better way to align those interests than by ensuring that managements place their own capital at risk by buying the company's shares.
ONE only need trawl through the annual reports and accounts of the UK's largest quoted property companies to see that in almost all cases, management's aggregate stake is less than 1 per cent of share capital.
In too many cases, bonuses are awarded for growth in asset size relative to an underlying index, a method that ensures reward for growth, not value. Granted, there is no guarantee that a sizeable management stake will ensure outperformance for shareholders. But it is interesting to note that, in the case of Prestbury, management's stake is about 40 per cent.
It may well be that the woes of quoted property companies are, at least in part, self-inflicted.
