Slow Starters
European REITs suffer through credit crunch

Although REITs have emerged as popular investment vehicles in the United States, Australia and Asia, the REIT structure has moved through Europe slowly. Those who eagerly awaited the passing of REIT legislation in the United Kingdom, Germany and Italy last year have been disappointed by the lackluster IPO and investment activity in those countries to date.

The credit crunch that originated in the U.S. has had a noticeable impact on European REITs, all but paralyzing the newly created REIT markets in the UK, Germany and Italy. "The timing of the launch of those REITs has not been ideal," notes Gareth Lewis, a director with the European Public Real Estate Association (EPRA).

Unfortunately, the new REIT regimes have coincided with the peaking and declining real estate markets, particularly in the UK. Shares of property companies across Europe, whether they be REITs or real estate operating companies (REOCs), are trading below their net asset value (NAV) by as much as 20 percent, according to Dionisio Meneses, a manager of the Schwab Global Real Estate Fund.

However, IPO activity is expected to increase once the capital markets settle down and more investors get comfortable with REITs. "There has to be an education of what the REIT structure is and what it provides to investors," says Jeremy Anagnos, managing director of CBRE Global Real Estate Securities LLC. "These are markets that have not had the exposure to REITs like the U.S., and eventually we will see more IPOs."

No honeymoon phase

In Europe, significant REIT markets have been established in the UK, France, Netherlands and Belgium, with these European REIT markets now worth over $145 billion, representing 22 percent of global REIT market capitalization and accounting for over 100 REITs, according to a recent research report from International Property Forum. This has provided international investors with increased opportunities for more liquid indirect property exposure in the European stockmarkets, in addition to investing in the traditional property companies in Europe.

In 1969 the Netherlands became the first European country to adopt REITs. Since then, many neighboring countries have passed REIT legislation including Belgium, Bulgaria and Turkey. To date, 13 out of the 27 European Union member states now have some kind of tax-transparent regime for property companies – most of which have been introduced in the last five years, according to Piet Eichholtz, a professor at Maastricht University who recently co-authored a research report titled "The EU REIT and the Internal Market for Real Estate."

Of those 13 countries, eight introduced REIT-like legislation after 2000. France, for example, introduced its REIT legislation, known as Societes d'Investissements Immobiliers Cotees or SICs, in 2003. Soon thereafter, 10 French property companies elected REIT status, and today there are 48 REITs in France. (The largest is Unibail-Rodamco with a market capitalization of $17.8 billion.)

"French REITs have been the most successful – well accepted by investors and the property companies themselves as all the major public real estate companies converted to REITs," Anagnos says. "Part of the success of the French REIT regime is that it was launched at a time when the property market was doing very well. Companies had an incentive to convert, and investors were rewarded with a tax break. That's why we saw it expand quite rapidly over the past couple of years."

The timing for the UK, German and Italian REITs was not nearly as favorable, and property companies, along with investors, responded accordingly. After REIT legislation passed in early 2007, 18 UK REITs had been established by December 2007, created primarily from the conversion of huge property companies including Land Securities Group plc and British Land Company plc.

With a total market capitalization of over $52 billion, the UK REIT market is currently the 4th largest global REIT market and the 2nd largest REIT market in Europe. However, only one UK company has had a REIT IPO. "It was a no-brainer for the companies that were already UK listed property companies to convert to REITs, but I think the UK REIT is a little wanting when it comes to IPOs and that other REIT regimes might be more attractive for IPOs," Lewis says.

The first 12 months for UK REITs were no honeymoon – UK REIT were down 35.08 percent–one of the worst performing REIT markets in the world.

G-REITs well positioned

Like the UK, Germany also introduced REIT structures in 2007 during a time when the market was correcting. So far, only two German corporations have obtained G-REIT status (alstria First German REIT and Fair Value REIT). According to published reports, the market capitalization for the two REITs was €13.5 billion.

Experts have estimated that the G-REIT market will reach €60 billion by 2010 despite the significant restriction that G-REITs cannot invest in German residential properties built before the end of 2006. They've gained confidence from the fact that seven companies have registered as pre-REITs – a status that entails application of the 50 percent exit tax reduction on disposals of properties to REITs and pre-REITs. As a result, pre-REITs will have a clear advantage in bidding for German properties.

"The German REIT regime is quite well suited for getting new REITs to come to market – it's reasonably well placed," Lewis says.

CBRE Securities, which has invested in French, UK and German REITs, has a "fairly positive" view about Germany and France, Anagnos says. "The REIT structure has not been a success in Germany, but the property market is pretty stable and solid," he explains.

Meanwhile, Italy's response to the REIT legislation it passed in 2007 has been even more lackluster than Germany. Known as Societa per Investimenti Immobiliari Quotati (SIIQ), the country's first REITs were expected to launch in Spring 2008. Italian real estate company Beni Stabili had been scheduled to convert to a REIT but decided not to because of the way the market is valuing property companies, according to published reports.

To date, no companies have gone public as SIIQs. However, CBRE anticipates a number of Italian IPOs and estimates that the market capitalization of listed real estate in Italy will reach € 20 billion in 2010 ($27 billion), up from € 5 billion ($6.8 billion) today.

Today, Finland, Poland and Spain are in the process of creating a REIT regime. However, Lewis points out that Finland's REIT proposal calls for restricting REIT structures to residential property.

Sweden also is pushing for a REIT structure, and Anagnos says more countries will pass REIT legislation within the next five to seven years. "Most of the REIT vehicles that exist today were created out of a real estate crisis or debacle – that's true of the Netherlands and Australia," he points out. "Spain might pass REIT legislation to spark investment."

One thing is certain, however: REITs are no longer just an American or Australian institution. And, once the global economy stabilizes and the capital markets get moving again, more companies and countries will gravitate toward REIT structures.

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