REITs are a tale of two continents. In the US, they are a 134-strong, $200bn public equity market business, plus a $70bn private one. In Europe, it’s been a struggle for REITs to establish themselves.
The US REIT sector is a 50-year veteran of several boom-and-bust cycles, but Europe’s fledgling one was delivered five years ago into the worst property/financial crisis in a generation – and survived. As our special feature shows, major REITs’ finances are in pretty good shape and they have the savvy needed to wring returns out of real estate in these less-than-stellar times.
If investors can be persuaded of the upsides, another plus of REITs is their access to cheap(er) equity capital via public markets. It helps their case that previously safe-as-houses investments like sovereign bonds have been shown to be anything but. And in the UK, Europe’s biggest REIT market, the government is loosening the restrictions it initially put around them.
But we shouldn’t burden REITs with unrealistic hopes. In Europe, we expect this tax-efficient structure to give small investors an entrée into institutional-quality property, solve commercial property’s debt crisis and fund social housing, all while giving share- holders attractive market rates of return.
Latterly, the emphasis has been on how REITs might help Europe’s credit-crunched real estate markets. In the US, specialist real estate debt REITs are well established. What’s more, following the 2008 financial meltdown, they have raised pots of capital.
Private equity funds like Starwood and Colony have floated new mortgage REITs, citing the coming period as one of the best for investing in 50 years. They have been both lending and buying commercial loan portfolios in the US and Europe, helping whittle down the debt mountain.
But on this side of the Atlantic, mortgage REITs do not yet exist; in the UK, the government seems unwilling to allow them.
US REITs also invest in housing and lubricate the mortgage market by buying RMBS. In Germany, they could provide an exit for the thousands of German flats put into CMBS loan portfolios about to mature.
In the UK, where the private rented sector is not as well-established, there are none yet, but the forthcoming abolition of the entry charge for REITs and other legislative loosening may change that.
The UK government is also consulting on social housing REITs. It’s a nice idea: get the public equity market to replace government funding and (increasingly expensive) long-term debt. But it won’t be easy to make the numbers stack up.
Because it is the numbers that ultimately convince investors to part with their capital. If – and it’s still a big if – REITs can be re-focused more as a source of steady income and less as a punt on property values, the sector has a better chance of expanding.
One positive is that since the financial crisis, everyone appreciates the virtues of a positive and stable income return again. Properly structured and run, REITs can provide this. Just don’t expect them to solve all the property market’s problems.