Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
REITs - a global phenomenon
Article Type: Guest editorial From: Journal of Property Investment & Finance, Volume 26, Issue 3.
This Special Issue focuses on real estate investment trusts (REITs) and their operation in four different markets across the world, two from Europe and two from Asia. While property markets are always essentially local, the REIT structure has recently become a truly global vehicle and its dominance is set to spread further. As a result, investors can now get ready exposure to global real estate, though some would question that statement, of which more below.
REIT vehicles are now available in 25 countries around the world, including all the major markets USA, Japan, Germany, the UK and France. But their REIT vehicles are not identical though they share a number of common features. These features are:
the entity derives the bulk of its income/profit from property ownership/investment (not development);
most of that income/profit is distributed to shareholders; and
then the entity pays no tax on its income and capital gains (though its shareholders may well pay tax on the distributions they receive).
As a result the REIT achieves the vision of President Eisenhower, who wanted the “man in the street” to be able to invest in real estate in a similar manner to the wealthy individual or large insurance company. In particular, REIT shareholders are not subject to the double taxation that occurs where a conventional corporation owns real estate, just as a direct property owner pays tax on the net income once.
The REIT world has seen phenomenal growth over the last 15 years. While the chief catalyst for that growth has undoubtedly come from the USA, the roles of the Australians and the Dutch in the story must not be ignored. Arguably the Australian “Listed Property Trust” market is the most developed globally, with LPTs being the preferred route for most investors into Australian real estate. Moreover, LPTs comprise 10 per cent of the Australian stock index, a much larger proportion than is found anywhere else, and Australia punches above its weight in the global REIT market cap (11 per cent).
The Dutch REIT vehicle the “belegging instelling” was instigated in 1969, so Europe has had some exposure to REITs for a while too. But The Netherlands’ role in the story is not just as a pioneer in Europe; their institutions have led the way as global investors in REITs, and it is no coincidence that LaSalle’s first client with a global REIT portfolio was a Dutch pension fund.
From these pioneers, there has been a steady increase over the last ten years in the number of countries with a REIT product and in the total market cap. The latter has increased from US$53bn in 1995 to US $146bn in 2000 and to US$518bn at the end of 2007, so REITs now comprises a very significant market in their own right.
The four papers in this edition are:
Andrew Baum and Steven Devaney’s “Depreciation, income distribution and the UK REIT”;
Chiang Yat-Hung, So Chun-Kei Joinkey and Tang Bo-Sin’s “Time-varying performance of four Asia-Pacific REITs”;
Ulrich Schacht and Jens Wimschulte’s “German property investment vehicles and the introduction of G-REITs an analysis”; and
Michael Quek and Seow Eng Ong’s “Securitising China real estate: a tale of two China-centric REITs”.
These papers provide a good example of the range of research opportunities REITs can provide as well as providing important insights. Baum and Devaney focus on a relatively narrow, but critical, aspect of the new UK REIT vehicle whether the depreciation of the properties held will adversely affect the operation of those REITs by constraining their cash flow. Chiang, So and Tang extend the literature on the characteristics of REIT returns in a multi-asset portfolio using data from Australia, Japan, Singapore and USA. Both Schacht and Wimschulte and Quek and Ong examine the details of national entities. Schacht and Wimschulte provide a detailed critique of the German REIT a vehicle for which, to date, take-up has been slow because of the restricted nature of the legislation. Quek and Ong analyse the relative merits, etc., of the Hong Kong and Singapore vehicles for investing in Chinese real estate an example of international vehicle arbitrage which is likely to become more prevalent. Yet it should be unsurprising that new REIT vehicles take some time to gain traction. Governments are naturally cautious at foregoing tax revenues (even if there may well be higher capture elsewhere in the system), so it is difficult to get the rules right first time. It must not be forgotten that it took over 30 years for the US REIT to start to fulfil its potential.
But none of these papers directly examine arguably the key issue about REITs are they a substitute for direct property? The US literature (see also Chiang, So and Tang) has generally concluded that REITs there have similar characteristics to small cap stocks, but “with a twist”, which may be the real estate component. Research on this issue in the USA is severely hampered by having such a lagging direct property market index. While it is clear that REITs have a dynamic that is not always reflected in the direct market (e.g. the boom and correction of 1996 to 1999) the two markets have been much more highly correlated recently, and particularly in 2006 when large numbers of public REITs were taken private.
Yet the only material difference between a public REIT and a private real estate fund is the way in which the trading price is determined; for the latter it is based on the net asset value (NAV) of the vehicle, while for a public REIT it is fixed in the market. Both vehicles hold properties for investment, within a financial structure operated by dedicated management. But public REITs (and quoted property companies) often trade at significant discounts or premia to their underlying NAV, so generating more volatility. Does that price volatility merely reflect the much greater liquidity REITs offer and is that sufficient to create a different return profile? If the IPD UK monthly total return index (the best direct market index in the world) is compared with, for example, the FTSE 350 Property total return index over the 21-year period since the IPD index started in January 1987, the similarities are more striking than the differences.
Real estate now has a truly global vehicle in the REIT. In many markets, the public and private property markets have been surprisingly separate. That state of affairs is sustainable no longer, particularly with the growth of investment in private real estate funds. Most of the world’s investors have a choice between buying highly liquid units from a screen at the press of a button or through the more complex structures of a private fund. That choice and the interactions of the public and private markets will provide plenty of opportunities for research as well as extraordinary investment opportunities in the future.
President Eisenhower was responsible for the original legislation that created the US REIT in 1960, though that legislation has been significantly amended since, particularly with the creation of the “Up REIT” in the 1980s.
Robin GoodchildGuest Editor