Location, location, location. The old real estate adage is taking on fresh meaning as nations around the globe adopt the real estate investment trust as an investment vehicle. From Bulgaria to Singapore, REIT laws have been enacted and REIT industries have been launched. In January, Israel joined the REIT club and in the coming year, two giants — Germany and Great Britain — are expected to join the trend.
British lobbyists and lawmakers are working out taxation issues, but a provision for U.S.-style REITs is expected in a finance bill in the U.K. later this year. Germany, the largest economy in Europe, is expected to introduce REIT legislation this year. Nearly three quarters of commercial real estate in Germany is owner-occupied, compared with 25% in the U.S., so German REITs should find plenty of corporate owners anxious to free up capital by moving properties off their corporate balance sheet.
But how well does the REIT model travel? Can it provide the liquidity and stability that the U.S. market has enjoyed in recent years — and bring assets of millions of individual investors into commercial real estate? It depends very much on the situation in each nation, says Tony Edwards, executive vice president and general counsel at the National Association of Real Estate Investment Trusts (NAREIT).
|REITS REACH AROUND THE GLOBE|
The number of non-U.S. companies in the FTSE EPRA/NAREIT Global Real Estate Index reflects the recent proliferation of publicly traded real estate companies, including REITs, outside North America.
|FTSE EPRA/NAREIT Global Real Estate Index constituents|
|Index Name||Number of Constituents||Market Capitalization in USD|
|Global Index||237||$270.7 Billion|
|Asian Series||48||$ 78.4 Billion|
|Europe Series||76||$ 50.2 Billion|
|North American Series||113||$142.1 Billion|
|Global Index||304||$685 Billion|
|Asian Series||70||$209.2 Billion|
|Europe Series||90||$129.7 Billion|
|North American Series||144||$346.2 Billion|
“If people believe there are efficiencies in accessing markets that haven’t been liquid before, then there could be growth opportunities,” he says. “But that would be very specific to the country in which you’re investing.”
In January alone, three nations took steps toward the creation of their own REITs. In Israel, where the Knesset passed legislation to eliminate double taxation of REIT dividends, Israeli investment house Excellence Nessuah launched REIT 1, the nation’s first REIT. Under the new REIT legislation, the fund must be listed on the Tel Aviv stock exchange within a year and must invest at least 75% of its portfolio in domestic real estate.
In mid-January, a group of business leaders in India published a report that proposed the creation of domestic REITs there, too. The Associated Chambers of Commerce and Industry of India advocated the establishment of REITs modeled after those in the United States and Japan as a way to introduce more capital to the largely debt-funded Indian real estate market.
Also in January, Pakistan’s ministry of law received draft rules and regulations that would guide the formation of REITs in the capital city of Islamabad, which would provide a model for the rest of the country. In announcing the draft rules, Dr. Salman Shah, advisor to the prime minister for finance, said introducing REITs in Islamabad could boost investor confidence through increased transparency for real estate investments.
The REIT business has always been international — Australia’s Listed Property Trusts have been around since the 1970s. But the globalization of REITs is clearly accelerating. Japan and France entered the REIT arena in 2001 and 2003, respectively. The Netherlands, Singapore, Canada and Belgium recently changed their laws to create REITS, and Hong Kong amended legislation last year to allow its REITs to invest in overseas real estate.
Over time, investors in these countries will likely invest in overseas REITs, Edwards says. “For example, as the Japanese investors found out what a J-REIT was and got comfortable with what it was, that significantly increased the amount that Japanese investors invested in global real estate securities,” he says. “And a significant amount of that investment went to the United States.”
North American companies still account for 50% of the world’s REITs, but international REITs are growing in number, according to NAREIT. Only 144 of the 304 public companies tracked in the NAREIT Composite Index are based in North America — most of those companies are in the United States, and have a collective market capitalization of $346.2 billion. That compares with 113 North American companies on the index four years ago. In that same period, the number of publicly traded Asian funds on the index has increased from 48 to 70, with a collective capitalization of $209.2 billion; European constituents on the index have increased in number from 76 to 90, with a current capitalization of $129.7 billion.
While newly-opened markets are undoubtedly a tempting target for investors when U.S. assets are so pricey, some industry-watchers predict that the long-term effect will be to bring foreign investment to the U.S. Dan Fasulo, director of the market analysis group at New York-based Real Capital Analytics, which tracks commercial real estate transactions of $5 million or more, cites the example of Australia. After many years of investing domestically, its powerful property trusts had to look for new opportunities. The result has been a huge influx of Aussie money into the U.S., especially in retail, with companies such as Westfield America establishing a high profile here.
In 2004, Fasulo notes, Tishman Speyer Properties launched an Australian investment fund with the express purpose of building an office portfolio in the United States. Fasulo says other U.S. companies have formed similar funds to purchase U.S. real estate with Australian capital.
“There are a lot of countries pushing through REIT legislation right now,” Fasulo says. “Once these REITs hit the public markets in those countries, I believe a lot of that money will wind up here, just as it has from the Australian REITs.”