REIT revolution in Europe

Knut UNGER, 2006

In 2005 the German lecturer Mr. Ressos said at a conference on Islamic Real Estate Finance: “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. 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.”

But the situation changed rapidly within few years.

“REITs have arrived in Europe. Never before has there been so much innovation and choice available to real estate investors”, the US-REIT umbrella NAREIT stated in September 20061.

The first Russian real estate fund, which is similar to European REITs, was established in 2003. Russian and international investors have been investing in these real estate funds, which have focused on housing development projects2. “The biggest complaint in countries like Russia is that there is not enough modern residential housing for the rising middle and upper class. One way to fix this would be to develop residential REITs to create more multifamily housing”, Neil Bane of the Carlton Group stated.

In 2004 Bulgaria introduced national REITs fllowing the U.S. and France models and hopes to attract financial capital, for instance for the booming vacancy-houses. Bulgarian REITs invest in a mix of residential, office and retail3.

European Public Real Estate Association (EPRA) estimates €100 billion to €150 billion 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. EPRA 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.

“In the smaller Scandinavian countries which are more socialized, the commercial real estate market is not that large, so there won’t be a tremendous number of companies converting to REITs,” says Neil Bane.

“From a market efficiency point of view, establishing a common European REIT might seem attractive”, experts say and speculate about a pan-European REIT, lobbyists are already working for in Brussels. It may come after more countries have established national REITs. And the next steps on this way are Britain and Germany.