Europe goes public

Over the past decade, the European real estate industry—once a relatively closed, illiquid market dominated by local players—has gone through enormous changes to become one of the most dynamic markets in the world. Foreign investors, primarily from the US, have entered the region; domestic firms have built up their own investment capabilities; institutional investors have broadened their geographic scope; governments and corporations have divested significant amounts of their legacy real estate assets; and, as any private equity real estate investor will tell you, competition has substantially increased.

In other words, the European property market has come to increasingly resemble its counterpart across the Atlantic.

Against this backdrop, governments in the UK and Germany are considering legislation to introduce publicly traded real estate investment trusts (REITs) similar to the US, a move which has the potential to transform the European property markets even further. The map on the opposing page shows just how many other countries already have (or are considering) one form or another of a public real estate investment vehicle.

The European property market has come to increasingly resemble its counterpart across the Atlantic.

For opportunity funds and other high-yield property investors, this emerging trend could be both a blessing and a curse. REITs, given their preferences for income-producing assets, will no doubt be active buyers for many of the properties that opportunity funds invest in once those properties have been stabilized. For example, many of the high-yield property investors now active in Japan see the growing J-REIT market as their most likely—and most profitable— exit route.

On the other hand, the more liquidity and transparency in a given market, by definition, the harder it is to find opportunities. Though REITs often pursue different investments than private equity real estate funds, their presence can nevertheless drive up overall prices and generate a more competitive environment.

In the pages that follow, our journalists examine the prospects and potential ramifications of REIT legislation in Germany and England, as well as the use of publicly traded real estate structures in other countries throughout Europe, with a specific focus on how such legislation will affect the private equity real estate industry. As a corollary, we look to the recent introduction of the French SIIC as a historical benchmark. Elsewhere, Michael Kreft, a partner in the Munich office of law firm SJ Berwin, analyzes the hurdles currently facing the passage of REIT legislation in Germany, where political tension threatens to derail the process. We also talk with Serge Fautré, the chairman of the European Public Real Estate Association (EPRA), to get his views on the future of public real estate in Europe. And finally, we present some statistics on the performance of the public property markets in Europe and beyond.

Despite the publicity surrounding the REIT phenomenon, however, there are some who believe their impact will be relatively limited, or at least, much more muted than what is trumpeted in the speeches of politicians or the popular press. Determining which side is right could take decades— after all, REIT legislation was passed in the US in 1960 yet it took more than 30 years before the vehicle truly became a significant piece of the capital markets.

Nevertheless, one need only look to the current state of the US market to see the impact that public vehicles can have on the private markets and vice versa. Today, US REITs such as AMB are starting their own private equity vehicles. Opportunity funds like The Blackstone Group are acquiring large, publicly traded property companies. And a growing number of investors including KKR, JER and GSC have launched their own REITs, some on the public markets and others as private vehicles.

The introduction of tax-efficient real estate investment trusts in UK and Germany—and possibly beyond—may or may not yield similar results. Yet their emergence in the region points to a trend shaping the global property markets: Even as real estate remains a local business, the capital markets serving it are becoming increasingly global—and more similar, rather than less.

The private equity real estate industry would do well to pay attention.