It is almost a decade since real estate investment trusts came into being. They were widely hailed as a way to increase investment into the UK property market. How are they doing today?
At the outset, we saw nine UK property companies, five of which were FTSE 100 members, convert to REIT status. The idea was that these would be the first of many, but while there are currently around 40 UK REITs, the scale of take-up has not been what was hoped.
This scale of the UK REIT market is in contrast to the US REIT market, which is the best established in the world. While the two share similar conditions, there is one major difference that could be the key to unlocking the UK REIT market: listing.
While in the UK, a REIT must be publicly listed on a stock exchange recognised by the FSA, in the US they can be publicly listed, public non-listed or private.
In 2012, the UK government brought in some changes to stimulate growth. One of these was that REITs could be AIM quoted to reduce costs and allow greater flexibility. At the same time, the 2% entry charge to join the regime was dropped.
However, it is clear that the requirement to list is a barrier. The money needed up front to list a REIT is substantial, and puts on pressure from the word go for a REIT to quickly start making money.
Those kind of pressures have defined the kind of REITs we have – a residential REIT is a rare beast indeed. The problem is that with the requirements to list, the already tight yields of residential property become much less desirable. In fact, what is interesting is how UK REITs have specialised over time. There are some that now operate purely in the retail space, having divested themselves of an office portfolio. Conversely, there are some that have chosen offices as their focus, with any built residential assets sold off. And there are those that choose student accommodation as their real estate of choice.
This specialisation is something the US market does well, and it seems we are following suit, but it won’t expand our market in the same way as removing the listing requirement will, especially around residential.
And it is residential that could see the market really boom – there is a huge demand for homes – it is acknowledged that we need 250,000 built per year to meet demand.
Many of these will be in the private rented sector and the PRS market could be a real growth area for REITs.
Again, the Americans do this well – they have a number of listed residential REITs largely owning city-based multi-family properties that are cost efficient in the way they are run and serviced.
In parts of continental Europe, the residential letting market is also strong. An example is Germany, where house price growth has been relatively muted over a number of years, allowing people the confidence to invest their savings outside property and rent their homes instead of buying them.
Albeit that the trend in Germany seems to be for longer-term leases and fewer landlord fittings than in the US, it produces properties that people can make their home over a number of years. This thriving rental culture has allowed the emergence of large-scale landlords, including some in the listed sector.
But for the UK, it is all a bit chicken and egg – our PRS sector is not advanced enough for large-scale REIT investment, but it is that REIT investment that could really expand the PRS sector.
With our economy on the up and property investment in the UK riding high, the time is now for the government to consider the unlisted REIT and help fulfil the potential we all saw in 2007.
Nicola Westbrook is a partner at KPMG UK
