Last December, the British government approved draft legislation that would facilitate the establishment of a REIT market in the UK. Barring any legislative delays, UK-listed REITs should be available in 2007. Investors in the UK, like many of their cross-Atlantic counterparts, have worried about the pace of housing price increases over the past five years, and the possibility that a speculative bubble could burst if sentiment turned. Prices have steadied recently, but analysts believe the market will continue to perform well after a lull this year. Halifax, a leading mortgage lender, predicts that residential housing prices will rise a mere 3 percent this year, broadly in line with consumer inflation.

German REITs are also expected to debut within the next year. The German property market, however, is a very different animal. Residential housing prices have fallen since 2003 as Germany has struggled with high unemployment and a stagnant economy. These factors will weigh on property market valuations for some time, according to Urban Land Institute senior resident fellow Stephen Blank. Also troubling for the REIT market, Blank notes, is the current controversy over the mispricing of open-end real estate funds sponsored by German financial institutions. Because of this, he says, "There’s been a rush by investors to get liquidity." The first German REITs may launch into an uncertain market, although in the long run, Blank believes that the REITs will benefit from that uncertainty as investors embrace the security of market pricing.

The Benelux countries all allow REITs. They have been available in the Netherlands since 1970. While the economic picture for Holland this year looks bleak, its real estate investment market remains buoyant. The economy of neighboring Belgium, which has allowed REITs since 1995, has fared better. Robust GDP growth, continued wage moderation and increases in both employment and household spending are contributing to growing demand for both commercial and residential property. Luxembourg also allows REITs; the minute size of its market reflects the small stock of domestic investment properties.

The first French REITs appeared in 2003, when they qualified for advantageous Société d’Investissement Immobilier Cotée (SIIC) tax status. The French real estate market has performed strongly in recent years and is expected to remain robust. Examples of French REITs includes Gecina, the country’s largest, with office and residential property valued at close to ¤9 billion (US$11 billion), and Klepierre, which owns 200 shopping malls.

Turkey established its own version of REITs, Gayrimenkul Yat, in 1998. The Istanbul Stock Exchange lists 10 REITs with a combined market capitalization of more than $1.3 billion. With GDP growth of almost 6 percent, Turkey is one of Europe’s fastest growing economies. The strong economy has boosted the real estate market, and REITs are expected to benefit from the sector’s improving performance. If Turkey’s bid to join the European Union is successful, it would be a major boost to its economic stability and growth.

Bulgaria introduced REITs legislation last year, but its market is tiny. Greece, Italy and Spain also allow REITs to trade.

Asia
A large proportion of Asian real estate remains in private hands or within companies that do not specialize in real estate, according to JPMorgan Chase analysts. However, the firm expects these assets to shift to REITs over time. Two of the hottest real estate markets–China and India–do not yet have REIT markets, so there is more demand than supply. In an article in the December issue of JPMorgan’s On My Mind investor briefing, its analysts wrote: "REITs attractions are based upon relatively low-risk returns and their potential to meet a need for inflation-hedged income streams that are desired by long duration funds, such as pension and life funds."

Some professional investors see the Japanese property market as now among the world’s most lucrative. "I would say that, across the world, Japan is probably the number one attractive market for us," says Michael Pralle, chief executive of Stamford, Conn.-based GE Real Estate, a $28 billion investment company. Pralle says several macroeconomic factors are trending upward and the economy shows signs of shaking off its long malaise. "When you have a market where land prices are at 25-year lows, the reversal of a 17-year trend of declining property prices and the combination of the strong macro environment, that bodes very well for the real estate market in Japan," he says. GE Real Estate is therefore investing aggressively in Tokyo and Osaka properties, and it is also looking to invest in industrial units.

The first Japanese REITs, known as J-REITs, listed in 2001; by the end of last year, there were 28 of them trading, with a combined market capitalization of 32 trillion yen. The J-REITs sector has performed well, delivering close to 20 percent per annum, according to JPMorgan, although the bank’s analysts warn not to expect these heady rates to persist.

In light of its recent rally, some investors feel the Japanese market is now too pricey. But Pralle believes it will hold up. "Time will tell if those REITs are overvalued," he says. "It depends on whether or not the cash flows from the underlying properties that the REITs hold will improve. My view is they will, because we’re seeing an improvement in fundamentals in Japanese real estate."

Hong Kong listed its first REIT, the Link REIT, last November. It now manages 180 formerly government-owned properties, mainly shopping malls and parking lots, and is the world’s largest REIT, with assets of around $3.3 billion. PricewaterhouseCoopers expects its dividend yield this year to be 5.53 percent. The Hong Kong market as a whole is still in the early stages of development, but investors hope that it will provide a gateway to one of the largest emerging property markets in the world. "There are people talking about or working on REITs who will buy properties in China," Blank says.

There’s not always a clear rules-of-law policy pursued in China.

GE Real Estate is already making direct investments in Chinese property, announcing in late March that it was putting $20 million into a residential development fund. Pralle warns that one of the biggest risks is the legal uncertainty. "There’s not always a clear rules-of-law policy pursued, particularly by some of the municipal governments, and that makes investing in the Chinese real estate market more risky than investing in a developed market," he notes.

GE Real Estate is also making direct investments in India; it has taken strategic stakes in IT parks in Bangalore and Hyderabad. India’s real estate market is booming, but to date there have been no REITs listed, although there are rumors they will debut in the near future. Some experts warn that the Indian market is overheated. Peter Hobbs, Deutsche Bank’s London-based global head of real estate and infrastructure research, warns: "In certain emerging markets, such as India, you have many private individuals buying real estate, and as these don’t tend to be the most rational investors, pricing has become very aggressive, such that the risk premium has become too narrow for such markets."

Australia has a highly developed REITs market, although the instruments are known there as Listed Property Trusts (LPTs). Hobbs says the fundamentals of the Australian property market look good, but it is difficult to get a single-country exposure to that market because Australian REIT managers often assemble international portfolios. "Australian LPTs have been very aggressive in buying in America, and now they are switching their attention to Europe," Hobbs says. "Some LPTs have up to 100 percent of their assets outside Australia, and the LPT market in aggregate has about 35 percent of its assets outside the country."

The Singapore REITs market, which debuted in 2002 with the launch of CapitalMall Trust, is also expanding rapidly. An example of a well-known REIT in the region is Ascendas, the first business and industrial property REIT to list in the country. By the end of last year, it held 59 properties valued at S$2.7 billion (US$1.7 billion).

REITs are also available in Korea, Malaysia and Taiwan.

Central and South America
These REIT markets remain less developed than other regions. The closest thing to a REIT structure in South America is Brazil’s Fundos de Investimento Imobiliário, but these are mainly funded with private capital. Costa Rica has a structure known as a real estate investment fund, which is similar to a REIT. According to an analysis by San José, Costa Rica-based Alejandro Antillon and Cristian Roberts of the Pacheco Coto law firm, Costa Rica’s solid economic growth has attracted investment in its real estate sector, which should boost the value of these funds. Meanwhile, Mexico has recently established a regulatory framework for REITs.

Art by John Webber.

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