These are good times for Europe 's real estate market. Since the beginning of the century, the markets of , , and the have been buoyant if not booming. Now there is evidence that amid a general economic upswing, 's property market - at €3trn Europe 's largest - is recovering after four difficult years. The expected launch of real estate investment trusts (REITs) in and the on January 1 should help to keep the party in European real estate going. Experts believe that, within a decade, a REIT market worth up to €100bn could spring up in each country. REITs will be especially welcome in , as companies, insurers and pension funds can finally divest their massive property holdings in a tax-efficient way. And if these investors want to remain engaged in real estate, German REITs will be an attractive option due to their liquidity and, again, taxprivileged status.
Even without REITs, European investors with longterm liabilities like pension funds are generating the
returns they need with real estate. The traditional way
is to invest directly in property. But this strategy is
falling out of favour as it does not afford enough
diversification in terms of risk or opportunity.
To increase their diversification, pension funds, particularly
those in , have begun to invest
heavily in real estate funds. There is, however, a third
strategy which competes with the fund approach:
investing in quoted companies that do one or more of
the following: buy, develop manage and sell real
estate.
Fraser Hughes, research director at the European
Public Real Estate Association (EPRA) says: "Real
estate securities are suitable for the ‘buy and hold'
strategy of institutional investors, including pension
funds. Over a medium to long-term investment horizon,
they will generate usual real estate-type returns."
Hughes also says the companies have an advantage
over funds in that they can offer a higher degree of
flexibility and diversification.
"An investor in real estate securities decides on the
entry and exit points in investing in a company, without
having restrictions placed on investment. And a
global strategy, where one invests in a diversified
portfolio of stocks, can provide exposure to many
quality management teams and thousands of buildings
around the globe."
Numerous real estate securities trade on major
European exchanges. Better-known examples are
British Land , which trades on the London Stock
Exchange (LSE) and IVG Immobilien, which is on
Frankfurt 's stock exchange.
Beneath the blue-chips, there has also been an
explosion of the companies on the Alternative Investment
Market (AIM) - the LSE's sector for growth
stocks. Out of the 72 real estate securities listed on
AIM, 60% have joined just since early 2005.
In a way, real estate securities can be thought of as
‘pre-REITs' as all of them are, in theory, eligible for
the vehicle's tax-privileged status. Indeed, according
to the British Property Federation (BPF), the bluechips
traded on the LSE plan to become REITs when
the relevant legislation takes effect on January 1.
Those on AIM will, on the other hand, be initially
barred from REITs, as the government feels that
they are not established enough and do not face the
same stringent listing requirements. David Melhuish,
assistant director of finance at the BPF, says, however,
that the government "has not completely shut
the door and we are doing our best to lobby ministers
to include them at a later stage".
Experts point out that while REIT status may boost
institutional investment in AIM-listed real estate
securities, it is currently not very significant. "Institutions
have big volumes to invest - let's say €1bn. If
they invest that money in AIM companies, they wind
up completely owning a dozen of them. This is completely
contrary to their strategy of being a silent
investor interested only in steady returns," says
Oliver Mihm, chief executive of Investors Marketing,
a Frankfurt-based consultancy for the financial services
industry.
According to Mihm, another barrier to big institutional
investment in AIM-listed real estate securities
is the fact that they offer little diversification - which
is why these investors would consider the asset class
in the first place. "I think the boom on AIM has
mostly been driven by the firms' wish to capitalise on
the excellent property market," he says.
Meanwhile, established real estate securities have
attracted a good deal of investment from pension
funds, especially those in the . Agood
example is ABP, a €194bn pension fund that serves
Dutch civil servants. Another is health care fund
PGGM, where the securities account for at least 2%
of its €71bn in total assets.
Of the 12% ABP allocates to real estate, twothirds
have gone to the securities, though this may
include REITs, which have existed in the
since the 1970s. In its last annual report, ABP
listed four Dutch firms, five American and one from
the as the top ten real estate securities it was
invested in. ABP also holds shares in British Land .
Patrick Kanters, managing director of real estate at
ABP, echoes Hughes'comments about the advantages
of real estate securities. "Actively selecting
listed real estate enables us to expose ourselves to
various attractive investments and a broad spectrum
of investment styles and strategies."
The picture for German pension funds, however, is
different. Unlike their Dutch peers, which began to
shift away from a strategy of investing directly in real
estate in the 1990s, German schemes have only begun
to do so this century. Amain reason was the market
slump that began in 2001 but ended this year.
To remain engaged in real estate, German pension
funds have turned to German institutional funds
called Spezialfonds. Some recent examples are BVV,
a €17.7bn scheme for 's financial industry,
as well as two pension funds for physicians: the
€7.5bn scheme NAEV and the €6.85bn scheme
AEWL.
An AEWLspokesman said: "We tend to prefer
Spezialfonds as they afford us a great deal of transparency
and allow us to influence the investment
process."
In a Spezialfonds, the pension fund can either work
with external managers or pool its money with other
investors to invest in properties internationally.
AEWLsays it relies on the latter approach, which
accounts for 10% of its total assets. The other 10% it
allocates to real estate is directly invested. According
to Georg Reul, board executive at IVG Immobilien,
Spezialfonds are popular among German schemes
because they are safe investments and not as costly to
maintain in their portfolios as real estate securities.
He says: "Moreover, real estate securities do not
necessarily offer more diversification than Spezialfonds.
There are, for example, securities that are simply
specialists.
"Perhaps the biggest advantage of the securities is
their greater liquidity. The securities may also generate
higher returns than funds, but they are also more
volatile."
Beyond its core business of buying, developing and
selling real estate, IVG has a majority stake (50.1%)
in Oppenheim Immobilien KAG (OIK), Germany's
leading provider of real estate Spezialfonds. The
other partner in the venture is German private bank
Sal. Oppenheim. On the other hand, some German
real estate experts point out that by going with
Spezialfonds that do not have external managers, the
schemes may not get the same access to levels of professionalism
as they would with real estate securities
and REITs.
Mihm says: "If the investors chose the option of not
working with external managers in a Spezialfonds,
they will again be responsible for the properties they
buy. In this case, they will have to hope that they have
selected the right objects."
In any case, Mihm and Reul agree that once German
REITs are launched, they will definitely compete
head-on with Spezialfonds for the schemes'money.
"REIT status will definitely be attractive to German
pension funds owing to their tax-privileged status,"
says Reul.
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