Global REIT industry said to be on the verge of a boom

A number of countries are in the midst of starting real estate investment trusts similar to those offered in the United States, and industry experts expect the now $450 billion market will balloon in the next three to five years.

While no one is giving a worldwide estimate, one projection for the growth in the European market alone is €200 billion ($247 billion).

Currently there are REITlike investment vehicles in 20 countries or jurisdictions worldwide.

"The world is opening up to REITs," said Jack McAllister, vice president for institutional investment affairs for National Association of Real Estate Investment Trusts, the Washington trade association.

"What's catching everybody's attention is that it has been percolating along and now it is coming to a critical mass."

The United Kingdom is expected to be the next country to codify a REITlike investment, tentatively called property investment funds. Britain's treasury circulated a draft and the comment period has just closed. The new investment is expected to be introduced in 2005, Mr. McAllister said in an interview.

If the United Kingdom's property investment fund is introduced, Germany, Italy and Spain are likely to introduce REIT-type investments in the next three to five years. French lawmakers already approved legislation just last year. Even a eurozone REIT is up for discussion, Mr. McAllister said.

"Germany is very aware and looking at this," he said. "The whole pace (globally) has accelerated in the past year."

In Asia, a Hong Kong REIT is expected to be introduced within the next 12 months. Some insiders say that could lead to Chinese officials creating a REIT-type investment, Mr. McAllister said. Japan's 2-year old J-REIT has a current market capitalization of $12 billion. That was the size of the entire U.S. REIT market in 1991, Steve Burton, director, ING Real Estate Securities, Philadelphia, said during a speech at the NAREIT Investor Forum held in New York in June.

Singapore has a growing REIT market, and Korean officials are looking at securitized real estate investment vehicles, said Scott Crowe, director and global real estate strategist in UBS Warburg's London office, speaking at the June forum.

This is good news for institutional investors in the United States and abroad, said NAREIT's Mr. McAllister.

Few institutional investors choose to buy so-called "bricks and mortar" real estate overseas. The financial infrastructure needed to make direct real estate investing feasible is not present in many countries and political risk discourages investors, Mr. McAllister said. Non-U.S.-based REITs will make international real estate investing more accessible.

"REITs have something that is liquid. You're not stuck with bricks and mortar on the ground," Mr. McAllister said.

Mr. Crowe agreed. "The proliferation of REIT markets is very important and goes hand in hand with the globalization of our sector," Mr. Crowe said in his speech. "If we have this consistent, transparent framework around the world, it makes the whole idea of taking advantage of the global opportunity much more feasible."

"What you can see is the persistently low correlation between regions for real estate, and what's driving that is the fact that real estate is a local business," he added. "But the benefit for the investor is a very strong increase in risk-adjusted returns and expand(ing) one's opportunity set."

"It gives institutional investors the ability to globalize their real estate allocation in a similar manner as they globalize stock and bonds allocations," Mr. McAllister said. "It's a natural follow-on for large plans that are very sophisticated ..."

Most of the appetite for global REITs will probably come from countries like Australia that have limited markets, said Bruce Eidelson, director real estate advisory services for Russell Investment Group, Tacoma, Wash. "It comes from markets with smaller home (real estate) markets. Australian investors need to look outside their home country," Mr. Eidelson said. "I see more interest in Europe. I have not seen a whole lot from the U.S., but that could evolve."

The €157 billion Stichting Pensioenfonds ABP, Heerlen, the Netherlands, has been investing in global real estate securities since 1997, said Robert Jan Foortse, senior portfolio manager at ABP, at the NAREIT forum. The plan's current asset allocation is 44% fixed income, 36% equities and 20% in alternative investments, he said. Of this 20%, half will go into real estate.

"This implies that we have invested €15 billion globally in real estate," Mr. Foortse said. "Now we only invest indirectly in real estate, and indirectly in real estate for us means both in public real estate and private real estate, but we will not own single assets anymore. Of the €15 billion euros … 48% is in Europe, 44% is in the U.S., and the balance is in Asia Pacific."

Investing in global REITs has its challenges, he said. Differing time zones make global REITs a 24-hour affair. Pension plan executives will also have to account for taxes or dividend withholding taxes as they go global, he said. Also, not all real estate stocks are liquid, Mr. Foortse said.

"I mean yes, you can trade, but how much does it mean when a stock only sells 500 shares each day?" he queried. "How much can you invest in that stock?"

Although non-U.S. REITs look similar, they are not identical to U.S. REITs, he said. Transparency is scant in Asian markets. What's more, even though a global capital market in real estate is evolving, real estate is still a local business, Mr. Foortse said.

"We are a global investors, but let me give you an example in the Netherlands. We had a listed company … it's called Real Estate Investments, … what happens with this stock? The CEO of the company comes on the TV twice a year on Sunday morning, and each following Monday, the stock is up 2%. Why? I don't know. … The show is aimed at higher-net-worth individuals in the Netherlands, and they buy. … Looking at this example, I sit at my desk in Amsterdam and I'm investing in Japan and maybe there's a Japanese show on Monday morning."