Investor's signpost

A Polish real estate index? Alas, not in the near future. But for the time being, let's take a look at the EPRA/NAREIT Global Real Estate Index which is used by investors around the world

Real estate markets, particularly in the USA, have to adapt to constant evolution and the effects of globalisation. This no doubt provides investors with opportunities to make lucrative capital investments, either directly or indirectly, by purchasing the securities (stocks and traded debts) of companies engaged in real estate.
The EPRA/NAREIT Global Real Estate Index, a market capitalisation weighed index, based on the last traded prices of shares of all eligible companies, is one of a number of indexes which provide guidance to institutional investors to help them in their decision making. It is structured so as to demonstrate general trends in real estate stocks.

Index by weight
The EPRA/NAREIT Index is compiled from the following factors: the latest trade prices of securities in the index, the weighting for stock (equal to the number of ordinary shares issued by the company), free floating weighting adjustment and exchange rates (where stocks are issued in currency other than index nominal). The final factor is the divisor which adjusts the index value. This is a figure which represents the total issued share capital of the index at the base date, i.e. the date the index was first listed. The divisor is adjusted when the composition of index constituents alters, and is constructed in such a way as to allow for changes in the issued share capital of individual constituents without distorting the index. The EPRA/NAREIT Global Real Estate Index has a base date of December 31st, 1999 at 1000.00 index points.

Global Index
The EPRA/NAREIT Global Real Estate Index has global prominence because it includes international companies divided by allocation into three real estate market groups: North America, Europe and Asia, each of which has a separate index.
The groups are defined to include countries whose companies constitute the index; provided that the latter are close-end companies listed on official stock exchanges in their countries of origin. This criterion imposes financial standards, such as the requirement to derive most of their earnings from real estate activity.

Adjusted Index
When analysing EPRA/NAREIT it is worth taking a closer look at the "free floating weight adjustment", a weighting indicator calculated for each company, which shows the number of ordinary shares allocated for floatation. Because of the free-floating weight adjustment, the index is defined in terms of the companies' real, freely-traded market capital. In the absence of this, stocks not freely available for trading, could to a greater or lesser extent, distort the real estate market trends indicated by EPRA/NAREIT. Such calculations are laborious and carry a substantial margin of error and so they are treated as estimates. In the final version they are rounded up to the nearest round figure, which reflects the percentage ratio of the share capital freely available on the stock exchange, to the number of all shares issued by a given company.

Poland too young for index
WIG - Budownictwo is the only index which deals with the Polish real estate market and no Polish company is included in the global or European indexes. Would an index along the lines of EPRA/NAREIT stand a chance of being established in Poland? Only if the following requirements were met: first of all, one would have to establish whether a sufficient number of companies listed on the securities' stock exchange were interested in investing in buildings or plots. Secondly, their financial results (EBITDA) would have to be to a large degree derived from real estate investment. The requirements stipulated by the European Public Real Estate Association (EPRA), a non-profit organisation which promotes the real estate sector in Europe, would also have to be fulfilled. EPRA's members include companies which invest directly in real estate, investment banks, pension funds, law firms, accountancy firms and schools of economy.
Unfortunately, the Polish real estate market's relatively low level of development and its insufficient capital, hinder the publication of an EPRA/ NAREIT type of index listing. Unlike western companies, Polish pension funds for instance, are not permitted to invest directly in the real estate market and are allowed simply to trade the shares of real estate companies and mortgage bonds. One would hope that Poland's accession to the EU will boost the real estate market and subsequently enable the creation of indexes, which would assist investors in making the right decisions.

Paweł Talar and Wojciech Planeta
The authors are employees of the National Bank of Poland