European REITs Are Building Their Portfolios and Gaining Strength

By Michele Lerner

REITs have arrived in Europe. Never before has there been so much innovation and choice available to real estate investors. With REITs or REIT-like structures already in place in France, Belgium, Turkey, Bulgaria and the Netherlands, and investors anticipating legislation soon to establish REITs in the U.K. and Germany, industry analysts have a positive outlook on REITs in Europe.

Fraser Hughes, research director of the European Public Real Estate Association (EPRA), says, “The European listed real estate market is expected to grow considerably in the next five to 10 years on the back of REIT legislation. In terms of underlying institutional quality commercial real estate, Europe comprises approximately 38 percent of the global total.”

For reference, North America is approximately 35 percent. In listed real estate terms, the European market only makes up around 20 percent of the global total, “so you can see that there is a disparity between the underlying real estate and the level of securitization,” Hughes says.

On a conservative basis, EPRA estimates E100 billion to E150 billion ($125.6 billion U.S. to $190 billion U.S.) coming to the market in the next five years. The major listings are expected from the German market if an attractive REIT structure is in place in 2007, Hughes says.

Hughes anticipates other major European economies following the examples of the U.K. and Germany once their REITs are operational, in particular Spain, Italy and the Scandinavian countries.

Pan-European REIT

Dr. Alexander Ressos, an international finance lawyer, lecturer at the University of Applied Sciences in Frankfurt, Germany, and legal counsel in Dubai, United Arab Emirates, speculated on the potential for establishing a common European REIT in a December 2005 presentation during a conference on Islamic Real Estate Finance.

“From a market efficiency point of view, establishing a common European REIT might seem attractive, but only four out of 20 European countries (Belgium, France, Greece and the Netherlands) have clear tax-efficient REIT structures in operation, while others utilize hybrid structures,” says Ressos. “Twenty-seven percent of the market capitalization of listed real estate companies in Europe operates as REITs, and the two largest European economies, Germany and the U.K., are only now deliberating the introduction of tax-transparent REITs.”

Despite the lack of a Europe-wide REIT, investor demand is expected to be high for all REITs in Europe over the next year and beyond. John Kriz, managing director of real estate finance at Moody’s Investors Service, says Moody’s briefings on REITs are well-attended by people looking for investment opportunities, particularly those anticipating REITs in Germany and the U.K.

		Germany and the U.K.: Ready to Roll According to Paul Haddock with the London Stock Exchange, the U.K. has published legislation intended to make REITs a reality in January 2007, and a number of the London Stock Exchange’s current quoted property companies have said they are seriously considering becoming REITs.

“I think there will be global interest in European REITs,” says Neil Bane, a director of the Carlton Group, an international real estate and loan sale investment bank. “Investors need to find a new product and will be looking at REITs, both the established ones in the European market and the up-and-coming REITs in the U.K. and Germany.”

According to Hughes, “The current size of the European market is small—20 percent of the total global listed market. We often hear investors talking about the ‘lack of product’ in the European market. Providing that the market will offer quality alternatives to investors, we expect demand to be strong.”

Global Investors

Investors in new and existing European REITs are expected to come from around the world, not just from European countries.

“In very general terms, listed real estate investment is becoming increasingly global. Investors are moving from a traditionally domestic approach to a more diversified global allocation,” Hughes says. “For U.S. investors in particular, investing outside of their domestic market now means they can gain exposure to emerging REIT markets in Europe and Asia. Based on the historic growth, performance and diversification benefits of the U.S. REIT market, this could offer some very interesting opportunities going forward.”

FTSE EPRA/NAREIT Global REIT - Non-REIT Index
Constituent Companies and Relative Weights Ranked by free float adjusted equity market capitalization in millions of dollars (USD) June 30, 2006
EUROPE REIT SERIES		Equity Market Cap	Free Float Range	Adjusted Market Cap	Percent of Series	Percent of Global
Rodamco Europe	Netherlands-REIT	$8,785.4	75	$6,589.1	18.22	0.91
Gecina	France-REIT	8,145.5	20	1,629.1	4.51	0.23
Unibail	France-REIT	7,991.6	100	7,991.6	22.10	1.11
Klepierre	France-REIT	5,345.0	50	2,672.5	7.39	0.37
Corio	Netherlands-REIT	4,181.8	100	4,181.8	11.56	0.58
Fonciere Des Regions	France-REIT	2,242.6	20	448.5	1.24	0.06
Mercialys	France-REIT	2,172.5	40	869.0	2.40	0.12
Wereldhave	Netherlands-REIT	2,020.9	100	2,020.9	5.59	0.28
Silic	France-REIT	1,932.3	75	1,449.2	4.01	0.20
Cofinimmo	Belgium-REIT	1,698.1	75	1,273.6	3.52	0.18
Vastned Retail	Netherlands-REIT	1,359.7	100	1,359.7	3.76	0.19
Eurocommercial Properties	Netherlands-REIT	1,351.4	100	1,351.4	3.74	0.19
Befimmo (Sicafi)	Belgium-REIT	966.8	100	966.8	2.67	0.13
Nieuwe Steen Inv	Netherlands-REIT	960.6	100	960.6	2.66	0.13
Vastned Off/Ind	Netherlands-REIT	667.4	100	667.4	1.85	0.09
Societe de la Tour Eiffel	France-REIT	600.5	100	600.5	1.66	0.08
Intervest Offices	Belgium-REIT	472.7	50	236.4	0.65	0.03
Warehouses De Pauw	Belgium-REIT	402.8	75	302.1	0.84	0.04
Acanthe Developpement	France-REIT	395.7	50	197.9	0.55	0.03
Affine	France-REIT	372.5	50	186.3	0.52	0.03
LEASINVEST-SICAFI	Belgium-REIT	273.8	75	205.3	0.57	0.03

Paul Haddock, who handles product management and development for the London Stock Exchange (LSE), agrees with this assessment, and expects investors from around the globe to invest in U.K. REITs as soon as they are established. “We think that U.K. REITs will benefit from a flow of investment from the U.S., Australia (where compulsory retirement savings are forcing fund managers to seek investment opportunities overseas) and the Middle East,” says Haddock.

“Not all of these investors will use U.K. REITs solely as a way to access U.K. property. We know that many U.S. REIT investors currently look for a higher rate of return than will be found in such a mature market as the U.K., but we think that the growth of a listed property market in the U.K. will attract issuers with assets from other countries.

Bill Hauser, portfolio manager for HVB Capital Management, anticipates a rise in European global investing along with American investment in European real estate funds. “Over time, we probably will see cross-border investing, but there is still a barrier there because of cultural differences,” Hauser says. “We haven’t seen that many European companies cross borders yet, but over time they will be headed in that direction for capital. The European market has maturity and stability compared with the Asian real estate market, which should generate U.S. interest in European REITs.”

		Growth in Other European Countries In 2003, France introduced les Sociétés Françaises d’Investissements Immobilièrs Cotées (SIIC), its version of the REIT, which is a vehicle with a corporate income tax exemption for specific items of income.

In addition to owning properties in other countries, European REITs more often own properties in several property sectors, unlike U.S. REITs, which tend to be more focused on a single property sector, Hughes says. “Good examples of this are: Land Securities, The British Land Company PLC and Unibail. However, as REIT markets develop and mature in Europe, we expect investors will demand more focused real estate companies and REITs.”

Kriz says REIT assets in Europe are primarily office and retail properties, along with some industrial properties. “Multifamily is not substantially part of REIT investments in Europe, partly because housing is often government-controlled,” he says. “Other countries have less of a free-market approach to health care than the U.S., with health care properties owned by the government or operated by a charitable institution.”

Kriz thinks that the mix of property held in European REIT portfolios may change over time, but he anticipates growth of European REITs will follow the growth experience of REITs in other parts of the world.