The FTSE 100 turned 30 years old this month. After three decades, is it still relevant to real estate?
Some 30 companies remain from the inaugural index, which was launched as the main indicator for the performance of companies listed on the London Stock Exchange on 3 January 1984.
These include Hammerson, at the time led by chairman and managing director Sydney Mason, and the UK’s biggest property company, Land Securities, which was in the midst of a development boom following a £100m rights issue in 1980.
Looking at today’s large cap line-up, reflecting a combined market capitalisation of just under £1.9trn, reveals the addition –and retention – ?of only one other pure property company in the form of British Land.
House builder Persimmon, which slipped out of the index in 2008 at the height of the financial crisis, rejoined the rarefied group in June last year when its value soared to £3.6bn. At the same time, builders’ merchant Travis Perkins made its debut.
Industrial giant SEGRO, house builder Barratt Developments and shopping centre owner Intu Properties have all slipped out of the FTSE 100 in recent years.
Looking at the list in isolation belies this waxing and waning of real estate representation over its 30-year lifetime – not helped by the recent property crash – and emphasises the wider question about the continuing importance of the index.
From the point of view of investors, some would argue that the FTSE 100 has lost ground to the FTSE EPRA/NAREIT Global Real Estate Index Series, which focuses on the property industry.
These alternatives weren’t around 30 years ago, but according to one adviser they are now the go-to.
He also added that much of the trading in FTSE 100 companies is done in big programme trades when, for example, a large institutional trader buys £100m of FTSE stock without reference to the specific sector.
The increase in passive investing – where fund managers give investors a market return – is where the list retains not just a cachet, but a function.
A company which is not in the FTSE 100 index will not be invested in by index tracker funds.
Therefore money has to be rotated into another of the top 100 firms when a company drops out of the index.
This also means that companies in the 101–110 slots get a lot of attention because it is expected there will be a lot of investing if they get promoted to the index.
Although there may be slightly more named property companies floating around the top 100 today than 30 years ago, looking at the real estate sector as a proportion of the stock market as a whole over that time tells a different story.
Historically real estate has accounted for 7.5% of the market capitalisation of the London Stock Exchange, while today it is languishing at around 2.5%.
EPRA’s regional weightings echo this trend across Europe with EMEA dropping from a peak of 36.5% in 1990 to 15.2% last year. In contrast, real estate’s representation in North America has grown from 7.8% to 50.3% over the same period.
The collapse of property values, and therefore ?share prices and market capitalisation, has not ?helped property’s representation among Europe’s listed top ranks, ?but it does not completely explain this trend.
So is entry to the FTSE 100 the holy grail for listed property chiefs? A cynic might point to the pay of the chief executives of this top tier of UK traded companies – according to the Financial Times the median total remuneration of FTSE 100 chief executives rose by 5% in the year to September 2013 to £4.4m.
Simply based on this measure, there is a strong incentive for bosses to crack the top 100.
However, a larger company comes with a large set of challenges and there are those – Helical Bar has been suggested – that prefer to stay small so that deals “really move the needle” in terms of company performance.
But while the index may have lost its relevance for some investors and is not desired by all companies, it pervades as representative of an industry keen to boost its image in the eyes of government and policy makers.
British Property Federation chief executive Liz Peace says: “It is important that real estate is represented in the FTSE 100.
“The largest listed property companies are renowned for their high standards of corporate governance, and for their ability to deliver big, high-profile projects in a responsible way through strong engagement with local communities.
“Being a high-profile public company brings greater responsibilities and greater visibility, but this is fundamentally a good thing for our industry.”
