The European listed real estate sector has the potential to double in size over the next five years, as banks look to offload distressed property assets held on their books and private investors turn to attractive REIT structures to realize the value of their investments, the Head of Research at the European Public Real Estate Association (EPRA) told a seminar at the Realty 2011 trade fair yesterday (May 25, 2011).
Fraser Hughes, Head of Research at EPRA said: "A number of opportunities are converging that have the potential to double the current 300 billion market capitalization of the European listed real estate sector over the next five years under a best-case scenario."
Hughes was speaking at the REALTY 2011 annual real estate trade fair in Brussels during a seminar on European Real Estate Investment Trusts (REITs).
He said Europe's three largest economies: Germany, France and the UK, have the greatest potential to increase the size of their domestic listed real estate sectors by between 10 to 50 billion each, but there also interesting situations emerging in Italy, Turkey, Spain and Ireland.
In Germany, the liquidity crisis in the 88 billion open-ended property fund sector which has locked-up investors' capital in the vehicles, is likely to increase pressure for the expansion of a more liquid and transparent listed real estate sector, particularly by institutional investors. Of the ten largest global property markets (with the exception of Italy at 0.6%), Germany has the lowest proportion of its underlying real estate held within the listed sector at only 1.5%.
In France, Europe's largest quoted property sector by market cap, expansion could be driven by more private companies floating their portfolio via the tax efficient SIIC (REIT) structure. But Hughes noted that the French industry needed to do more to boost liquidity to attract investors, as the limited free float in real estate shares meant that of the 80 quoted property companies in France, only 10 are included in the FTSE EPRA/NAREIT European real estate shares index.
In the UK, Europe's deepest and most liquid listed property market, banks are slowly beginning to shift property assets held against distressed loans from their books, and the country's REIT investment vehicle offers an efficient means of exiting these situations.
In Spain and Ireland, which have both experienced deep shocks to their financial systems through highly leveraged speculative property investments, the utilization of listed vehicles to help the market clearing mechanism shift distressed real estate stock into the more robust and transparent listed real estate sector is probably still some way off, but is likely to come into play in the future.
Italy's government is sitting on extensive property holdings, which could be used to help reduce its large fiscal deficit, but EPRA believes that shortfalls in the Italian REIT structure are limiting the efficient use of the equities market.
On Europe's periphery, Turkey is perhaps a surprising candidate for lifting the continent's listed real estate market capitalization, but it has a robust REIT regime, which includes residential property in contrast to Germany, for example, and a dynamic strongly growing economy with a young active population.
Fraser Hughes concluded: "The value of Europe's investable property stock is the largest in the world at around US $9.0 trillion, but only a tiny fraction of that is held by listed real estate companies. We are on the cusp of a period of unique opportunities over the next few years to substantially increase the European quoted property sector to the benefit of investors, governments, and private companies alike."
Source: Bellier Financial