Establishing UK REITs market will be slow burn

While 2007 will see the advent of the UK Real Estate Investment Trust (“REIT”), it could take many years before the REITs market is fully established and investors are able to benefit fully, says Fidelity International.

While the structure of a REIT differs from country to country, the length of time taken to establish and evolve a mature, diversified REIT market has been similar - around thirty years in both the US and Australia for example. The US now has a universe of 138 listed REITs, while there are 26 listed property companies in Australia.

With nine UK companies now converted to REIT status, and a handful of companies with either confirmed conversions or intending to convert in 2007, the initial UK REIT market will be extremely narrow. With REITs already in place or pending in over 20 countries, investors ought to consider casting their net more widely to include the world’s more established REIT markets.

REITs Around the World:

US

The main feature of 2006 was continued strong performance, outpacing the broad domestic markets for the seventh year in a row, as measured by the S& P;
REIT prices have been supported by a strong wave of privatisation. In 2006 13 major M& A transactions were announced in the REIT market involving $43billion in equity market value;
Fundamentals should continue to improve in 2007 across the REITs sectors.

Asia

The past year saw a continual growth of the REIT market and the number of listings as well as the types of listings – the first service apartment REIT converted in Singapore;
Asia Pacific property market continues to exhibit a relatively low correlation with the US and Europe;
Strong potential for growth in property in 2007.

Europe

The introduction of REITs in the UK and Germany in 2007 will create a positive environment in the sector. The anticipation behind the introduction has led to the development of strong share price performance and the closure of discounts;
Italy has indicated that it intends to introduce a REIT structure, this may be in 2008;
France listed in 2003 and regulation has undergone 4 significant changes in recent times;
The main feature of 2006 was the yield shift that has driven massive growth in the sector;
We can expect further yield compression in most markets, including the Netherlands and Belgium.

Peter Hicks, Head of IFA Business, Fidelity International comments: “It’s clear that the introduction of REITs in the UK is a very positive thing for investors. However, with just a small number of REITs available in the UK in the early days, investors are not going to achieve the right level of diversification simply by focussing on the UK.

“REITs are a global phenomenon, there are many mature markets and if investors cast their net widely, they can benefit from REITs around the world including the UK.

Hicks concludes:“There are plenty of investment opportunities– over 20 countries already have REITs in place or are proposing to introduce REIT-like structures. However, there are many obstacles that often prevent an investor from benefiting – time and knowledge as well as rules and regulations. This is where a mutual fund comes in, providing investors with diversification and access to not only UK REITs, but the rest of the world’s REIT markets too.”