By Todd A. Canter

Real estate investment trusts (REITs) were introduced in the U.S. 45 years ago and today are spreading rapidly in various forms around the globe. REITs in the U.S. were specifically designed to make income-producing real estate accessible to investors from all walks of life. More than 20 countries have adopted some type of REIT-like structure while several more are currently considering some form of REIT legislation, including the United Kingdom and Germany.

REITs are popular for many reasons. For investors, they provide a more efficient vehicle for real estate investment. For operators, they provide a tax-efficient scalable platform with greater flexibility to source debt and equity capital.

In general, REITs avoid or minimize corporate level tax as long as they agree to distribute substantially all of their otherwise taxable net income to their shareholders in the form of dividends. As a result, there often is only a single tax on the income stream at the shareholder level based on dividend distributions.

In light of the distribution requirements, REITs have a high dividend yield relative to other asset classes. Globally, the average REIT dividend yield is 4.1 percent versus less than 2.3 percent for other equities.

Real Estate Securities: Low Correlations Across Regions & Within Regions
	Europe	Asia Pacific	North America
Europe	1.00	0.42	0.36
Asia Pacific	0.42	1.00	0.31
North America	0.36	0.31	1.00
	Australia	U.K.	U.S.
Cont. Europe	0.37	0.51	0.25
Canada	0.13	0.15	0.38
Japan	0.10	0.15	0.18
Hong Kong	0.24	0.27	0.23
U.S.	0.25	0.35	1.00
Source: EPRA/NAREIT Global Real Estate Index; Calculations use monthly Local Currency returns for the period January 1990– December 2004

When a country adopts a REIT-like structure, history suggests the dividend yield for the asset class increases dramatically as a result of the distribution requirement. In Japan, for example, the dividend yield for real estate securities was less than 1 percent prior to the adoption of the J-REIT structure. Today, the Japanese REIT dividend yield is 3.2 percent. In the U.K., where the current dividend yield is less than 3 percent, we expect to see a significant increase in yields if legislation is enacted in 2006 as expected.

Another reason behind the global popularity of investing in real estate securities is performance. Over the past 20 years, real estate securities have outperformed other equities and government bonds around the globe, providing double-digit returns over five, 10 and 20-year time horizons. Moreover, on a risk-adjusted basis global real estate securities have outperformed other global equities over the same time horizons.

In addition to strong relative performance, investors are attracted to the diversification benefits of listed real estate securities. Investment performance is driven by real estate fundamentals and property fundamentals have strengthened or weakened in different cyclical patterns relative to other asset classes. Thus, real estate security returns have been relatively uncorrelated with the returns of other equities and bonds. In addition, real estate fundamentals are driven by local economies, so performance varies from one market to the next. Thus, correlations across regions and even within regions are low. An investor who already has real estate exposure to one market can gain additional diversification benefits by going global.

Strong Performance Relative To Other Asset Classes Through 6/30/05

Source: GPR Index, UBS Global Property Investors Index; MSCI Global Equity, JP Morgan Global Bond Index, in Local Currencies

From a U.S. investor’s point of view, the addition of global, non-U.S. real estate securities to a portfolio consisting of global equities, global government bonds and U.S. REITs adds 53 basis points of return (while holding risk constant) at the midpoint of the risk-return spectrum. Incremental portfolio returns are even greater at higher risk-return preference levels. Increased portfolio returns without increased portfolio risk can also be found in studies of U.K. and Japanese investors. Adding global, non-domestic real estate securities to a mixed-asset portfolio consisting of global equities, global bonds and domestic listed real estate securities increases total portfolio returns at the midpoint of risk and return by 43 basis points for U.K. investors and by 296 basis points for Japanese investors.

As a result of these attractive investment characteristics (high dividend yield, competitive returns, low correlations, and diversification benefits), the market for global real estate securities is growing rapidly, with a total equity market cap for the sector more than doubling, from $288 billion to $603 billion in two years. Much of this growth has resulted from an increase in the number of listed property companies in the FTSE EPRA/NAREIT Global Real Estate Index, which today stands at 296, as well as the performance of the index, which is up 10.2 percent for the first nine months of 2005.

Despite the strong growth, this is only the tip of the iceberg as less than 7 percent of the universe of institutional-quality real estate has been securitized worldwide. We believe that much of the growth in securitization going forward will occur in Europe and Asia as the percent of institutional-quality real estate in securitized format is less than 4 percent in each of these regions.

The dramatic growth of REITs around the globe has several implications for the real estate industry and for investors. For the industry, it is leading to improved liquidity and transparency.

For investors, the growth in securitized real estate creates more opportunities to access an attractive investment vehicle while mitigating many of the risks associated with this asset class.