The gap in performance between successful and struggling properties is growing. The Iberian REIT & Listed Conference, that took place last week in Madrid, was to perfect stage to discuss how to generate value through operational management and wether if optimising asset performance necessarily means optimising share performance.
The event organised by Iberian Property and EPRA featured a roundtable discussion moderated by António Gil Machado, Partner at Grupo Iberinmo, where experts discussed the difficulty to find alpha and understand real estate the further we step aside from a passive management approach. Their discussion covered investment strategies, valuation challenges, the role of listed real estate companies (REITs), and how leverage and macroeconomic conditions shape the industry’s future.
Ana Escalante, Equity Research Analyst at Morgan Stanley, outlined how investors are moving from a purely defensive approach to selectively embracing more opportunistic strategies as macroeconomic conditions improve. However, she pointed out that the market still presents significant pricing dislocations, particularly between direct real estate investments and REITs.
One of the biggest hurdles remains the NAV discount, which arises because public market investors demand a higher return than private investors. While private real estate valuations adjust slowly based on transactions, listed real estate stocks reflect real-time investor sentiment, often exaggerating downturns. For generalist investors, this discount can be misleading, making it harder to attract capital into listed real estate.
She also discussed why traditional valuation methods have struggled in real estate investing. In theory, cash flow should be an effective metric for assessing listed real estate companies. However, historical performance suggests that cash flow-based stock-picking strategies have not consistently delivered superior returns. Instead, what truly matters is how well companies generate returns on NAV and whether they can offer both stable income and capital appreciation.
The debate over real estate valuations
A key theme of the discussion was the divergence between book valuations and actual market prices. Ana Escalante emphasized that valuations (the numbers reported in company financials) are often lagging indicators, while real estate’s true value is determined by what buyers and sellers are actually willing to pay in the market. "For some continental European companies, the numbers you see in financial reports might be a ‘fiction’ ", Ana noted. “The market price is often much lower, which can hurt investors who lack deep industry knowledge.”
With a large expertise in direct real estate investment, Samuel Duah, Chief of Economics at BNP Paribas Real Estate, highlighted that "stable income returns, supported by capital growth, will be key to attracting core capital back into the market. However, the sector is not simply waiting—new players have already stepped in to fill the gap. Liquidity is available, but the real question is at what price investors can secure it."
Besides he underlined that cap rate compression is unlikely in the near term, meaning that investors shouldn’t expect asset price increases to drive returns just yet. Instead, investment strategies should focus on stable income and long-term growth potential.
Listed Real Estate vs. Direct Investment: a perception problem?
Albert Olasolo Artero, Portfolio Manager at Zurich Insurance Company pointed out that many institutional investors are already investing in real estate, but they remain selective. He agreed with Samuel Duah stance, mentioning that "no one believes real estate companies will default - the question is whether investors want to bet on short-term price fluctuations or take a long-term position based on intrinsic value.”
On his own words, he confessed that "what I want from REITs is a stable return, a growing return, and at least flat capital values because investors tend to see REITs more like bonds than traditional real estate investments - you put your money in, and you receive a predictable payout until the end of the project". Based on his rationale, initial investors shouldn’t be looking at REITs for rapid revaluation or major price appreciation; that expectation is more suited for real estate companies with longer holding periods of five to ten years. The appeal of REITs lies in their ability to generate steady income, and the market generally has confidence that they will maintain that income stream.
Still, he alerted for the fact that many REITs were structured in a low-interest-rate environment, where companies could take on more leverage to boost rental income and, in turn, deliver higher dividends to shareholders. As Ana Escalante pointed out, that financial model worked well under those conditions. However, now that interest rates have shifted, asset devaluations have followed. While this may not always be immediately reflected in NAVs, the market is already pricing it in.
"For me to consider investing in real estate now, I need to see stability in valuations because that is the fundamental appeal of treating REITs like a bond alternative. If you compare REIT dividend yields with those of the broader market, such as the IBEX 35, they are more or less flat".
"Over the past five years, returns haven’t been particularly strong, but REITs hold some of the highest-quality assets. With that comes a trade-off: investors accept lower dividend yields in exchange for greater stability", Albert emphasized.
Ana Escalante stressed that generalist investors have historically underweighted European REITs, partly due to the sector’s relatively small global footprint. However, she revealed that US investors are beginning to show renewed interest, seeing opportunities in the valuation gap between US and European REITs.
Albert backed this up by stating that Zurich Insurance has been increasing its REIT exposure over the past 6–12 months. He anticipates that once interest rates start declining, valuations will begin converging toward NAV, triggering a flood of capital back into the sector.
The Role of Leverage: A Risk or an Opportunity?
Leverage remains a key concern for Morgan Stanley’s real estate analysis, Ana explained. While declining interest rates have eased some pressure, many real estate companies are still highly leveraged. This means that instead of investing in new opportunities, they will use future cash flows to pay down debt - limiting their ability to grow. However, some companies have maintained strong balance sheets, positioning themselves to capitalize on the next phase of the real estate cycle.
Counting with the interaction of the audience, Carlos Krohmer, Director of Corporate Development at Colonial, raised an important point: investors often oversimplify the relationship between real estate yields and interest rates. He argued that while headline yields may seem low, they fail to account for total return dynamics. Using Colonial as an example, he pointed out that while the company’s yield sits at 5.1%, their earnings per share (EPS) have grown by 13% annually over the past four years.
"Instead of comparing real estate yields directly to interest rates, investors should look at total returns, including capital appreciation. Even when interest rates were near zero, the spread between total real estate returns and inflation remained consistent".
"However, many public market investors are fixated on short-term valuation metrics, failing to appreciate the long-term value creation of listed real estate companies", Carlos Krohmer noted.
The roundtable agreed that European REITs are likely to outperform the broader equity market in the near term, a rare but powerful trend. "REITs are high-beta stocks - when markets rally, they tend to outperform significantly," Albert concluded.
