Friday Letter The beginning of the world as we know it

The acquisition of Equity Office Properties has been the talk of the real estate world for a few weeks now—and rightly so. Huge deal, well-known players and the usual holiday dearth of news has understandably kept the story at the forefront of the national business press.  

But while much of the spilled ink has focused on the interest in REIT takeovers by private equity firms, considerably less has analyzed the other side of the equation: institutional real estate investors are increasingly investing in global REIT securities—and posting some very impressive returns in the process.

According to a recent report released by Ernst & Young, there are 484 public REIT vehicles listed worldwide with a market cap of around $608 billion (€458 billion). Perhaps unsurprisingly, 253 of these vehicles—around $395 billion worth—are listed in the US, but markets like Japan and Hong Kong are also bustling with activity. And it’s sure to expand with REITs soon to be a reality in the UK.

When PERE recently visited with RREEF, the real estate arm of Deutsche Bank, the group’s fast-growing international securities business came up more than once in the conversation. As RREEF’s investors have become increasingly interested in the expanding world of public real estate investments, the firm has responded in kind. And they’ve been enjoying considerable success. According to industry sources, RREEF’s public securities portfolio has performed significantly above the Wilshire REIT Index in 2006.

Los Angeles-based CBRE Investors, the private equity real estate arm of global brokerage Richard Ellis, has also broken onto the international public REIT scene via its CBRE Real Estate Securities vehicle. With approximately 40 to 45 percent of the fund invested in US securities, the remainder is spread out in capital markets across the globe.

“It has hedging capabilities in that we over- and underweight various regions or countries around the world,” Robert Zerbst, chairman of CBRE Investors, told PERE this summer. “Recently we’ve been underweighting the US and Australia and overweighting Europe and Asia. It’s not like a straight-up portfolio. You’re making bets. This is one of the fastest growing parts of our business today.”

It’s not hard to see why. As E&Y reported in their recent survey, there are a number of markets around the world providing investors with out-sized returns. New Zealand, for example, which only has six REITs, nevertheless posted a return of 24.6 percent. Over three years, the seven REITs in South Africa returned an average 34 percent, posting a 23 percent return last year alone. And while most Asian REITs trade at a premium to asset value, REITs in South Korea and Malaysia trade at very low, or even negative, premiums to net asset value.

The success enjoyed by these countries and many others is influencing governments around the world. In addition to the UK, REITs are anticipated to spread to Germany, Italy and a number of the emerging economies of Asia.

Or as Chuck Leitner, the global head of alternative investments at RREEF, put it: “REITs are coming to a neighborhood near you.”