REITs worldwide: Preparing the invasion

Knut UNGER, 2006

Until the 90ies a couple of countries introduced national REITs or similar structures. But its was not before the rapid growth at the hot markets in the USA, Canada and Australia since late 90ies that REITs became a globally leading vehicle for transnational investments in real estates. The REITS industry since some years is intensively striving for new coasts: Asia and Europe build the main focuses for the globalization of the business. The fast REITs-boom of the past years is even affecting countries which started their own REITs decades ago and they lead to a “harmonization” of alternative national types of real estate investment vehicles.

The Netherlands in 1969 was the first European country to introduce REITs. Rodamco Europe Netherlands-REIT (market capitalization: $8,785.4) is one of the largest REITs in Europe.

The Dutch are major investors in the global real estate market. For example, ABP Investments is the second-largest pension fund in the world, designated for Dutch government workers and those in the educational sector. ABP has offices in both Amsterdam and New York1.

Meanwhile the Netherlands’ REIT structure is under review, in order to make it more competitive to the new European structures. The Netherlands especially is losing investment funds to Luxembourg. Even the French and Belgium REIT structures, and the proposed structures in the UK and Germany are less restrictive. Thus it is discussed to relax restrictions on foreign shareholders, taxes and development activities. There is a debate that shareholder restrictions, the minimum required distribution of dividends, withholding taxes on distributed dividends should be abolished. But it is more likely that the Dutch Government firstly will strip restrictive interpretation of the permitted activities (no project development) and secondly the ownership/shareholders’ requirements2.

Australia introduced REITs (“Listed Property Trusts”) in 1971. LPTs are tax-free at the trust level, the annual distribution requirement for LPTs is to distribute 100 percent of income to unitholders. In 2005 the market capitalisation of REITs was USD 60 bn. The Australian LPT sector is the most entrenched in the world, accounting for nearly 10 percent of the capitalization of that country’s stock market. 49 percent of domestic investment-grade property in 2005 was already on LPT balance sheets. “As a consequence, when LPTs these days eye growth, they have no choice but to look to other markets.”3

Australians are forced to invest a part of their income in private pensions and they do that predominantly in real estates. For that reason the amount of capital is larger than the available real estates.

Westfield Group the largest Australian LPT, is a leading global retail property owner with interests in more than 126 shopping centers in Australia, New Zealand, the U.S. and the U.K.. In 2006 the Listed Property Trust “Record Realty” which belongs to Allco Finance Group bought office buildings from German Telecom. “Australian Fonds intensively are seeking for attractive investments”4. Australian investors expect that prizes at European real estate markets will rise.

At the same time Australian tenants suffer heavily from rocketing rents.

During the last decade in Australia the proportion of low-rent homes has fallen by about 15%, the average monthly payments on new loans have increased by about 50% ($500), average house prices relative to income have almost doubled, opportunities to rent public housing have fallen by about 20%. Currently more than 1.5 million lower-income Australians, especially renters and recent purchasers, are incurring housing costs above 30% of their income. 67,051 recipients of Commonwealth Rent Assistance (in Victoria) pay more than 30% of income on housing (and hence live in unaffordable housing)5.

Turkey has a REITs-similar structure since 1989. More recently, the play a more and more important role not only for commercial real-estates, but even for housing and for foreign investmentsTurkish REITs are exempt from corporate taxes. Although they are required to float at least 49 percent of their shares to the public, all Turkish REITs are set up by large established financial groups that retain a controlling interest6. There currently are 10 REITs with a combined equity market capitalization of more than $1.3 billion listed on the Istanbul Stock Exchange (ISE). The largest Turkish REIT, Gayrimenkul Yatirim Ortakligi, has a market capitalization of more than $500 million. IS Bank is the largest shareholder controlling stake of 50.9 percent.

Although handicapped by the extreme inflation over the past decade Turkish REITs are even becoming a vehicle for foreign investors. In 2006 the huge Deutsche Bank (Germany) established a certificate which allows investments in Turkish REITs. Arab capital, especially from Dubai, is heavily investing in commercial complexes and skyscrapers in Istanbul.

The Turkish market is booming. Real Estate prizes in Istanbul annually increased at about 14 – 20 % during the past years7. Turkish construction industries in the first quarter of 2006 grew at 26 %, not only because of large infrastructure projects, but even because of huge new housing schemes for middle class which raise at the outskirts of large cities throughout Turkey. As economy is booming and interest rates are low, more and more private households are financing their housing by mortgage. It is estimated that the volume of private mortgage will raise from 12,1 bn $ today to 60 bn $ with the next years. The size of the total real estate market in Turkey is estimated at $ 82 billion.

Brazil since 1993 has a structure called Fundos de Investimento Imobiliário (FIIs), that is referred to as a REIT, but it is mostly used for private investments in specific projects. The first Brazilian FIIs were used to fund new developments and as an exit strategy by developers. In 1995 the first FII began to trade publicly and entered the retail market. In 2005 64 FIIs operated in Brazil. In 2004, the volume of FII trades increased by 700 percent, although the actual number of transactions remains low. The dominant factor are high interest rates, which makes it difficult for FIIs to compete with funds8.

Italy does not have a real REIT structure, but since 1994 investors are allowed to invest through special funds called fondi di investimento immobiliare, or FII. These are described9 as pools of investments held jointly without legal individuality and managed by a management company, called the società di gestione del risparmio, or SGR. The FII is tax exempt.

Before the election in 2006 a financial lobby group was pushing for the creation of real REITs.

Spain so far does not have a REIT structure, but other forms of privileged real-estate-investments. Spanish real estate capital uses French REITs as a form for investments in Spain. Consequently, there is a debate on introducing real REITs in Spain as well.

Belgium introduced a REIT-like structure in 1995, called SICAFI (société d’investissement à capital fixe en immobilière). Belgium is home to 11 REITs, with a combined equity market capitalization of nearly $5 billion10. The largest Belgium REIT is Cofinimmo with 1,7 bn US$ market capitalization. It owns the seventh-largest office property portfolio on the European market. Even other large Belgium REITs are active in the office markets, especially in the booming eurocrats sector in Brussels.

56 percent of the real estate investments in Belgium are by foreigners, including the German open-ended funds with 22 percent of total investment, Dutch with 15 percent and U.K. with 6 percent. Increasing investment comes from Ireland (5 percent), the Middle East (4 percent) and Australia (3 percent).

Greece since 1999 has REICs (Real Estate Investment Company) and REMFs (Real Estate Mutual Fund).

The Mexican government 2004 made changes in its Ley del Impuesto sobre la Renta (LISR), that could lead to the creation of REITs. The LISR extends tax benefits to trusts whose business purpose is to purchase and/or manage real estate. The properties include hotels, office buildings, industrial properties, supermarkets, hospitals, factories and apartments11.

Even Germany with it’s closed and open-ended real-estate funds have a partly comparable structure for real-estate investments. But they did not attract foreign capital.