HMHQ NetworkGlobal Reit market has been transformed, says Ernst & Young
Tue, 13 Nov 2007, 15:43
While the global market as a whole has grown, some regions have fared better than others, the report says. Over the past 12 months the largest Reit market in the world, the US, has lost almost a quarter of its real estate investment trusts through mergers and acquisitions.
'We've seen a dramatic shift in Reit formation away from North America and toward Asia and Europe in the past 12 months,' says Michael Frankel, global director of Reit services at Ernst & Young.
'While a number of quite large North American Reits have been taken private in the past year, we've seen a tremendous outpouring of capital in Asia and Europe, where Reit regimes in the UK and Turkey have helped the rest of the world surpass the US for the first time in the total number of Reits.'
Frankel believes other maturing markets around the world, such as Australia, Canada and the Netherlands, may witness a similar wave of Reits being taken private in the year ahead, albeit on a lesser scale, because of tax considerations in some countries and the higher cost of public capital. Two large Australian Reits have already been delisted following private equity deals.
In 2006, according to Bloomberg, North America accounted for 253 Reits compared with 198 elsewhere in the world. By June this year, however, the rest of the world had 253 Reits compared with 195 in North America, although the US remains the largest single market with 169.
Ed Psaltis, the report's author and a member of Ernst & Young Australia's transaction advisory services group, points to the impact of recent or pending Reit legislation in three major European real estate markets, the UK, Germany and Italy, which is just beginning to fuel growth in Reits.
'Moving into 2008, we expect to see a much more stable Reit market in the UK as more investors become educated about the sector, and with Germany's legislation now taking effect and Italy coming on board next year, the potential exists for Euro-Reits to really take off,' Psaltis says.
The report also points to rising levels of debt among Reits globally, the result of low interest rates in many markets. Only Turkey has interest rates high enough to dissuade Reits from boosting debt levels this year.
Across the 15 markets analysed, average debt levels grew by about 6 per cent to 40.29 per cent, up from 34.24 per cent 12 months earlier. Based on this debt level, the report estimates that the total value of real estate owned by Reits globally now stands at USD1.27trn.
However, it also notes that as a result of the fallout from the sub-prime residential mortgage market collapse, Reits looking to refinance in the coming year are likely to face tighter covenants and increased financing costs, both of which will have a negative impact on real estate values and returns.
Ernst & Young's second annual report analyses markets in countries where real estate investment trusts are publicly traded, including Australia, Belgium, Canada, Japan, Netherlands, New Zealand, Singapore, South Korea and the US, as well as the relatively new market of the UK.
Ernst & Young adjudged Singapore to be the best performing Reit market, with a total rate of return of 72.92 per cent this year, up from 1.7 per cent in 2006. The Singapore market was buoyed by growth of almost 50 per cent in the number of Reits from the previous year and a threefold increase in aggregate market capitalisation to USD22bn, as well as a supportive regulatory environment that benefited domestic Reits and attracted cross-border listings.
South Korea, which has a relatively small Reit market, saw a 43 per cent average return, followed by Japan (42 per cent), France (38 per cent) and South Africa (37 per cent). The US (12 per cent) and UK (11 per cent) trailed the rest of the countries surveyed.
The report also found that Asia has been instrumental in the growth of the global Reit market, with the region taking a top three place for one-year total returns. By contrast, the US Reit market has contracted following lower returns and higher volatility than most other markets.
Ernst & Young has the largest integrated real estate practice of any accounting group, with 5,000 professionals worldwide providing audit, tax, and transaction advisory services to more than 4,000 real estate clients such as property owners, investors, lenders, and users, including many Reits, homebuilders and developers.
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