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A relatively slow market recovery may trigger European listed real estate companies to buy assets in 2010 to shore up their direct result, a panel discussion organised by the European Public Real Estate Association (EPRA) learned this week. But some companies, where managers’ bonuses are based on portfolio growth, may buy recklessly, warned Dick Boer, director of property research at Kempen & Co.

Boer said banks appeared to be ramping up their lending again. ‘If you can get money at 4% and buy assets at 6-7%, that means you can make high single-digit or low double-digit returns.’ This, he said, could be especially appealing to those companies that will see their direct returns pressured by rental declines.

‘For instance there are companies in the Netherlands with a 3% average cost of debt which has to be refinanced at 5%. They are going to see their direct result come under pressure and in order to maintain a steady direct result they might be triggered to buy assets going forward,’ Boer said.

Kempen is currently working on a study looking at remuneration programmes for managers and which companies may feel the most pressure on their direct result. Boer said he was not concerned about companies like Eurocommercial Properties, Unibail-Rodamco and Vastned where remuneration is based on long-term growth. However, some European REITs pay bonuses to managers based on the size of the real estate portfolio or growth in certain countries. Some even pay bonuses based on the number of green buildings acquired, Boer pointed out: ‘It’s good that they are buying green buildings. On the other hand, if they buy like crazy to increase cash flow per share, what is going to happen in five years time if the buildings become vacant?’

Hans Op ‘t Veld, head of listed real estate at PGGM Investments, said the industry should worry more about what comes after 2010. ‘The way I see it we could well find ourselves in the eye of the storm. We may have blue skies, with acquisitions and everything looking great in 2010, but 2011 is what I am worried about. Someone has to foot the bill for all the government expenditures. We have to see what interest rates do. We also to have to be a little concerned about consumers as taxes are going to go up,’ he said.

The EPRA Amsterdam panel discussion was hosted by law firm Loyens and Loeff.