With $4.5 billion flowing into real estate mutual funds last year, the highest total ever, real estate investment trusts became a household name. Now, the REIT investment is rapidly gaining momentum in Asia and Europe, and the end result will be a more transparent international real estate trading market, say industry experts.
A January 2004 report by Ernst & Young shows that 19 countries have either enacted or proposed legislation to allow tax-exempt REIT structures. Last year, France and Taiwan enacted legislation, while Hong Kong proposed legislation.
Some countries like the Netherlands allow private REITs like those of the Inland Corp. and Wells Real Estate Funds in the U.S. In other countries like France and Belgium, the REIT, or at least the parent company of the REIT, must be publicly traded.
Why are REITs in demand? Today's investors are looking for transparency and liquidity, and governments are heeding the call. Another plus: U.S. REITs are exempt from corporate taxation on the portion of taxable income they distribute to shareholders, and other countries want to emulate that model.
“Countries have seen the model work successfully in the U.S, where despite [weak] fundamentals, the REIT property market is doing quite nicely,” says Doug Sesler, managing director at Citigroup Global Markets. From the beginning of 1999 to the end of 2003, the Morgan Stanley REIT index, which included 115 U.S. REITs, nearly doubled, while the S&P 500 fell about 20%.
In Japan, the government looked to the success of the U.S. and Australian models before enacting legislation in 2000. With one of the largest property markets in the world, Japan's commercial real estate was traditionally held by public corporations, with less private developers. This formula made perfect sense for a rapid securitization of the market in the form of CMBS and J-REITs.
The end result of the globalization of REITs will likely be more fund flows across continents, experts say, as investors become more comfortable investing in international REITs, whose structures are similar to those in their own country. This effect is already manifesting in Japan, where 20% of J-REIT investors come from outside the country, while money flows outward with open-ended Japanese funds purchasing U.S. REIT stocks.
Citigroup's Sessler agrees: “As people understand REITs more broadly around the world, it makes them more educated on the REIT concept and easier for them to invest in U.S. REITs.”
Often, the structures have similarities to the U.S. model. While the U.S. requires companies to pay out 90% of income in the form of dividends, the Netherlands requires 100%, France 85% and Belgium 80%.
In France, one major reason the government adopted the REIT structure was to secure additional revenues, says Fraser Hughes, research director of the European Real Estate Association. Converting to a REIT requires an exit tax totaling 16.5% of latent capital gains pertaining to real estate and stocks held at the time of election. The tax prevents a private company from converting to a REIT without it being a taxable event.
One country on everyone's radar is the United Kingdom, whose treasury department announced in December 2003 that it would consider a REIT structure, and legislation could be in place by 2005, Hughes says.
The U.K. is incredibly important, since its market cap makes up 50% of the $70 billion (euro) market of publicly traded European real estate companies. According to Hughes, the country has been rapidly losing public real estate companies over the past few years, many of which moved assets offshore to avoid high taxes. The tax take from such firms has shrunk from $300 million in 1998 to $150 million last year.
The general feeling in Europe, Hughes says, is that if nothing changes in the U.K. market, by 2008 there won't be a U.K. public real estate structure.
|*As of March 18, 2004|
|**Total return is share price appreciation/depreciation plus reinvested dividends.|
|Sources: National Association of Real Estate Investment Trusts, European Public Real Estate Association, Euronext|