|  Real estate investment trusts, a popular vehicle for US and Australian investors for years, finally came of age in Europe’s biggest property markets in January. MARK FAITHFULL reports
When a number of the UK’s leading property magnates gathered to ring the bell at the London Stock Exchange (LSE) in the heart of London’s Square Mile at the beginning of January, they had good reason to make some noise. A month earlier the lid had finally come off setting up real estate investment trusts (REITs) in the UK, as it had in Germany. Many of the two nations’ big commercial property developers and owners have converted or signalled their intention to convert, with the FTSE’s first UK REIT index comprising nine members. Another seven are due to join. “We are delighted to celebrate the commencement of the UK REIT regime,” waxed Christopher Gibson-Smith, chairman of the LSE, at the market-opening event. “The exchange has worked hard with the UK property industry and with government to ensure the best possible conditions for UK REITs, and we are confident that the result will be cheaper capital-raising for companies and more opportunities for investors. UK REITs have got off to a good start as an asset class.” The big news is all about tax advantages and investor accessibility. A REIT is a tax designation for a corporation investing primarily in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute a large majority of their income (typically 90%–95%), which may be taxable once in the hands of investors. The tax advantages this brings are the obvious hook for would-be investors, but REITs were primarily designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks and shares. In other words, they encourage small and medium-sized investors, who can invest in a single entity that covers multiple properties rather than a single development, thus spreading exposure to risk. As an investment vehicle, they act much like bonds – they are unlikely to produce stellar growth but are, in theory at least, sensible and solid investments. Like other corporations, REITs can be publicly or privately held. It would all seem a bit more innovative if Australians and Americans had not been managing and investing in REITs for decades. Australia’s first REITs were listed on the Australian Stock Exchange as long ago as the 1970s. Similarly, REITs are a well-established element of US investment, with brokers estimating that REITs have attracted 5%–10% of investors’ portfolio value. Specialist REITs have proliferated, with prison and hospital REITs, for example, attracting niche investors. This in turn has pricked the interest of a number of pub chains in the UK, with Greene King, Mitchells & Butlers, Marston’s and Punch Taverns all said to be looking at converting to REIT status. There are early indications that property companies are weighing up different opportunities. British Land, which has converted to become the world’s fifth-largest REIT, has hinted that it may get involved in areas of property investment other than its core commercial offices and out-of-town retail sites and may look to move more into the leisure sector, with an eye to both hotels and the pub trade. “I would not rule out a shift into other sectors provided they met our financial criteria and generated good returns,” says British Land CEO Stephen Hester. British Land already has a couple of hundred pubs and some hotel assets in its portfolio, and knows these markets well. Equally, it would be logical for large property holders – like pub and retail chains – and property specialists to combine expertise and assets. “It’s unlikely that a major part of British Land’s portfolio will in the future be invested in pubs and hotels, but that’s not to say we won’t ever do it,” says Hester. Rival property group Land Securities has already bought 30 UK hotels from the French hotelier Accor for €496m since the New Year. It is leasing the hotels back to Accor but is folding the newly acquired hotel assets into its REIT portfolio.  Indeed, the upsurge in REIT activity should mean that European property will give investors better returns than the Asian or US markets this year, according to ABN AMRO. Nancy Holland, the Chicago-based head of ABN AMRO Asset Management’s property team, says that a rebalancing of investment portfolios towards property combined with the introduction of REIT legislation in the UK, Germany and Italy would make valuations in Europe more attractive than those in Asia and the US. “With the introduction of REITs on its way and fundamentals improving, we believe the current valuation of companies still offers a substantial upside,” she asserts.
There is already a fair amount of US and Australian money sloshing around in European property investments and such projections could accelerate that trend, bolstering capital growth but putting further pressure on yields. “We have seen quite a lot of investment money looking for suitable properties in Europe,” says Nick Axford, property agent CBRE’s head of EMEA research and consulting. “Given the weight of capital in the market seeking asset investment, it is likely that further yield compression will be seen in many markets.” Although the majority of REIT activity so far has, as expected, been from established property companies converting to REIT status, analysts believe that in time different types of companies will be drawn to the market. John Nelson, chairman of Hammerson, concurs: “I believe REITs will introduce new classes of investor to the real estate sector and increase liquidity and transparency in the market.” REITS: A GLOBAL VIEW AUSTRALIA: REITs are a well-established investment vehicle down under, with publicly listed REITs dating back some 30 years. EUROPE: Belgium, Bulgaria, France and the Netherlands all allow REITs in some form, but the markets have remained quite cool. This may change with Germany and the UK’s entry, however. GERMANY: REITs was introduced in Germany on 1 January 2007, with retrospective legislation due in March/ April. German property developers/ owners are very active internationally, although a high proportion of them are privately owned. HONG KONG SAR: An important Asian hub for REITs and seen by many as pivotal to property investment opportunities in mainland China. ITALY: Expected to allow REITs this year. JAPAN: J-REITs have existed since December 2001, and Japan represents Asia’s biggest REIT market. MALAYSIA/SINGAPORE/TAIWAN/ SOUTH KOREA: The Asian exchanges are vying to become REIT hubs. A strong competitor is Malaysia, with sharia-compliant (suitable for Islamic investment) products that could divert Gulf State money. MIDDLE EAST: Dubai opened up potential REIT investments last year, but the tax-free status of most countries in the region and issues over corporate transparency have prevented the market taking off to date. UK: REITs was introduced in the UK on 1 January 2007. Most major developers and property owners are switching to REIT status. As a major global property player, the UK’s entry into the market is significant. USA: The largest REIT market and very well established, with tax-free status and diversified investment risk attracting smaller investors. |