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Stakes are high for European real estate investment trusts

31st May 2005
By IB Staff Writer

Expectations among asset managers for real estate investment trusts (REITs) are high, according to a survey of 100 investment professionals in the UK, France, Spain, Italy and Germany. Four out of five asset managers expect a rise in demand for property investments. Half of the respondents indicate REITs have the potential to rival corporate bond funds.

However, two thirds are unhappy with the efforts of their regulators to establish a REIT market in their jurisdiction. In Australia and the US, the established REIT structure has proved a fundamental element of economies due to their benefits to corporations, government and investors. However in Europe, France is the only country with an established REIT structure in place.

REITs making property investment more accessible

Innovation in REIT products means investing in a stake of property is made more accessible to a broader range of investors at all levels of client - from major institutions and High Net Worth individuals through to the man on the street. All can gain a diversified investment in property within a relatively tax efficient and liquid framework.

New products such as REITs are a relatively unknown concept in Europe, however they are generating much interest, and three quarters of European asset managers believe investors should have some exposure to property investment within their portfolio.

Across Europe the asset management industry overwhelmingly expects to see strong growth in demand for property investments across all customer groups. Over four in five asset managers in Europe anticipate increasing demand in each of the mass market, high net worth and institutional client segments. Half expect growth of at least five per cent per annum over the next three years.

A rival to corporate bond funds?

There has been a great deal of speculation about the potential impact of REITs in Europe, in light of their significance in Australia and the US, where an established REIT structure has proved a fundamental element to their success.

Some 50% of asset managers surveyed by Datamonitor believe REITs do have the potential to rival corporate bond funds. Given the relatively low risk, high-yield nature of REITs, they are perhaps most likely to appeal to investors who would otherwise place assets in corporate bond funds, a huge established market across Europe. However, the UK, Spain, Italy and Germany have not as yet followed France's example of establishing an REIT structure.

Almost two thirds of asset managers surveyed are unhappy with the efforts of their regulators to establish REITs structure in their jurisdiction, with one in five expressing particular dissatisfaction. Asset managers in Italy, followed by Germany then Spain, are the most dissatisfied. In Italy, just 15% strongly agree that their regulator has done enough to support the development of REITs, compared to 35% in Germany and 42% in Spain.

The UK paves the way for REITs

The UK has published a consultation paper alongside the Budget 2004 to consider how a REIT might be developed. Many consultation responses expressed the view that any potential UK REIT structure should not be over-constrained by legislation. Gordon Brown's 2005 Budget provides details of the UK's plans, and though questions remain, UK REITs remain on track for launch in summer 2006.

Overall there is a strong sense among European asset managers that their national regulators have failed to do enough to support the development of REITs in their country. The launch of REITs in France and subsequent acceleration of the French REIT market appears not to have gone unnoticed by asset managers sitting in other European jurisdictions.

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