Fraser Hughes: Pan-European REIT? - A long, long road.

Europe is an extremely diverse region in political, economic and social terms. Every country is governed locally, under its own individual political process, determining its own legal and fiscal framework under European Union guidelines. Despite the introduction of the €uro on 1 January 1999, Europe still has nine individual currencies in circulation, within the twenty eligible European countries of the FTSE EPRA/NAREIT Global Real Estate Index. The countries are highlighted in table.1 below. Political and economic differences aside, many cultural differences exist between the countries. The European Union establishes a good degree of common ground between members; however the task of bringing all of these separately governed legal jurisdictions together under one common European REIT umbrella will prove both long and convoluted path. This task must be driven by trade associations such as EPRA.

Fraser Hughes,
Research Director, European Public Real Estate Association (EPRA)

Table 1
FTSE EPRA/NAREIT Global Real Estate Index: The 20 Eligible European Countries.

In table.1, of twenty countries listed, only four - Belgium, France, Greece and the Netherlands, have official REIT structures in operation. Italian investors utilise a hybrid structure. It is worth mentioning at this point that other 'developing' European countries not yet covered by the index do have existing REIT legislation, for example, Russia and Turkey. The obvious first step towards a common European REIT is to establish individual country REIT legalisation on a broader basis, throughout the European region. Graph.1 indicates that currently only 27% of the market capitalisation of Europe operates under REIT

legislation. The two largest economies in the region – Germany and the United Kingdom, are still in deliberation concerning the introduction of REIT legislation. The UK, the most heavily weighted country in Europe, in market capitalisation terms, comprises approximately 50% of the region. Total free float market capitalisation of the European market as at 30 June 2005 was $108 billion.

In Global terms, Europe comprises a disproportionately small slice of the listed real estate market. North America has well established REIT structures, Australia, Japan,

Graph 1: Pan-Europe Market Capitalisation Breakdown 30 June 2005

Graph 2: Global Market Capitalisation Breakdown 30 June 2005

Singapore, Hong Kong, Singapore, New Zealand and South Korea all have well established, or new formed REIT structures, however Europe lags far behind. Consequently Europe makes up less than 20% of total Global free float market capitalisation ($565 billion) – see graph.2. Incredible, considering Europe comprised 35% of the OECD Gross Domestic Product Total in 2004¹. REIT legislation covers approximately 75% of the global real estate market.

EPRA strongly supports tax transparent initiatives throughout Europe. In general, evidence shows that tax transparency has stimulated growth and development in listed markets. Historically, tax transparent structures have provided a number of benefits. The beneficiaries include the governments, the companies, the institutional and private investors, and ultimately the tenants.

In order to meet these aims, EPRA introduced the TTC in 2002. Richard White of Ernst & Young in London is the chairman of the TTC. Under the leadership of the TTC, EPRA has, and will, support government initiatives wherever necessary in their preparations to introduce these tax transparent structures. EPRA is focused on the promotion, development and representation of the European listed real estate sector. Further, tax transparent structures deepen liquidity, meeting one of EPRA's long-term go