The REIT European roadshow was in town last week, aiming to attract European investors, reports Karen Lennox.
NAREIT, the Washington DC-based trade association which argues the Real Estate Investment Trusts’ cause from Wall Street to the White House, hit Europe with its whistle-stop tour: London, Amsterdam, Paris, Frankfurt, Zurich and Geneva, and all in five days. Its aim: to reveal the wonders of REITs to European investors . . . and attract their cash.
UK institutional investors are no strangers to investing in listed property companies – which is what, to all intents and purposes, REITs are – but NAREIT has a harder job on its hands in convincing them that US property is where it’s at.
First launched in the 1960s, REITs attracted bad publicity in the 1970s and early 1980s when they became highly leveraged development vehicles – many of which came a cropper when the property market crashed. UK institutions are themselves still nursing fingers burnt in the US.
The 1990s REITs are a new breed altogether. Most are Equity REITs: only 30%-40% geared and with the management teams taking a significant equity stake, they are specialised vehicles which concentrate on investing in specific types of property. The residential sector is still the most popular, but retail and healthcare are growth areas, and there have also been issues of industrial and hotel REITs.
Alongside the Equity REITs, which own real estate and earn income from rents, there are Mortgage REITs set up to lend money to property investors and Hybrid REITs, a mixture of both “Within the next few years REITs will become a major part of the New York Stock Exchange,” says Peter Sidoti of NatWest Securities, one of a growing band of Wall Street stock analysts focusing on REITs.
In the past two years there have been 141 new REIT issues, raising $18bn – more capital than was gathered in the previous 30 years.
But today REITs still account for just 2% of US real estate. However, NAREIT says that by 1997-98 they will have grown to 30%-40% of the US property market. Half the influx of funds will come from pension funds, the association predicts.
REITs were set up with a tax advantage over straightforward property companies: they are exempt from corporation tax. As a result, investors in REITs avoid the double taxation trap of paying income tax on dividends paid after corporation tax has been deducted. But, to qualify, REITs have to comply with certain criteria:
- a minimum of 100 shareholders;
- no fewer than 50% of shares to be held by five or fewer people;
- at least 75% of assets in real estate;
- pay out at least 95% of income to investors as dividends.
In recent years, US institutional investors have been tempted to invest and in many cases transfer their real estate holdings into the tax-efficient REIT structures.
“US pension funds own around $140bn of property,” says NAREIT president Mark Decker. “That’s 7% of their total portfolios, which probably takes 50% of their time and effort to manage. There is a definite management attraction of indirect investment in real estate.”
For many US funds the REIT route has been their first foray into the indirect property investment market. Now NAREIT is trying to sell the idea to foreign institutions and attract their cash.
Some foreign investors are already testing the water, but they are few and far between. Sophisticated Dutch investors have been the most enthusiastic, partly because offshore funds invested through the Netherlands Antilles are especially tax-efficient.
Decker is confident that other European funds will be willing to give REITs a try: “European institutions are more sophisticated than their US counterparts and have a more global approach to investment strategy,” he says.
Bearing this in mind, REITs are being marketed as the best way to benefit from the upturn in the US property cycle: less risky than direct property investment and more liquid with the added bonus of attractive tax treatment.
In addition, tighter corporate governance means that many of the risks previously associated with investing in private US property vehicles have been pared away.
At the bottom line, recent past performance has been impressive (see graph). “REITs are defensive,” says Sidoti. “Investors will not find many negative surprises.”
