Property investment has definitely emerged as a global opportunity for investors worldwide. A large number of investors are buying real estate assets in foreign countries. Institutional and private investors have found this as a lucrative opportunity to increase their earnings with minimum risks. Especially in the last decade, global real estate investment has developed into a lucrative for small as well as large scale investors. Technological innovations and development of the telecommunications sector has also played an extremely vital role in the enhancement of the global real estate industry. Thanks to these advancements in science and technology, global real estate operations have become cost effective and time saving. Access to global information has become easy and fast for investors even in the remote areas.
Introduction of new legislations regarding the structure and operations of REITs and other REIT-like vehicles have been adopted by various countries. The United Kingdom has also implemented the new legislation regarding this matter from Jan 1, 2007. Various other nations are also taking steps in the right direction towards the globalization of the real estate market as the world has shrunk into a global village thanks to this era of telecommunication.
In this paper, we will first discuss the reasons for the recent boost in the global real estate business in the last decade. Afterwards, we will move on to the future of the real estate industry especially the factors which are more likely to influence the property sector in the near future. Then, we will move on to the benefits of shifting this business towards a global operational scale. Moreover, we will also cover the issue of considering international property as a globally traded asset and the risks associated with this business. In the end, we will discuss the basic structure of Real Estate Investment Trusts (REITs) with a focus on the REITs in the United Kingdom.
Global Real Estate Investment going Mainstream
Real estate investment is emerging as a brilliant opportunity for investors worldwide. In USA, there has been a significant increase in the number of pension funds and gratuities which have been allocated for this purpose.
Retirement plans are taking a new shift towards investment in the real estate sector since it usually guarantees a stable and secure source of income. The investments that come into the United States from other countries are now more inclined towards the real estate business. A significant point to note here is that most of these investments seem to be for long-term purposes since a large number of them come from pension funds of other developed countries. The United States is not the only country that is enjoying this trend. Other countries too are experiencing the benefits of this new shift in the international business market. In a worldwide survey carried out in December 2003, 70% people said that organizational investors should apportion at least 11% in real estate business. These things point out to the fact that the real estate business is attracting a lot of people from all over the world.
The preceding ten years have shown many developments in the real estate sector on a global scale. Investors from all over the world are finding this business stable and this factor has boosted the trustworthiness of this lucrative trade sector. There may be numerous factors that have contributed to the improvement of the property business, but the following three factors are of utmost importance:
1. Global increase in the number of benchmarks
2. Multiplication of REITs
3. Development of unregistered investment channels
Global increase in the number of benchmarks
The global increase in the number of benchmarks for the assessment of performance and earnings in the real estate market has played a vital role in the development of this sector. Previously, there had been such benchmarks but only in a few countries. The primary reason for his growth in benchmarking capabilities is their increasing demand in the eyes of the potential investors. IPD, a British company, has stepped outside the UK into Europe and Japan to gather data regarding the values and profits from the real estate business. In the United States, the NCREIF index has crossed the $130 billion mark and it now comprises of more than 4000 properties. (Chen, Mills, pg. 17, 2004)
Benchmarks in the property sector, such as those regarding profits and performance, are extremely valuable from the investors’ viewpoint. This provides the investors, especially organizational investors, an evaluation of the market in a particular region and guides them in the anticipation of profits before they take a decision. Even those benchmarks which have been made a short time ago help the investors in the comparison of their own profits with the average profits of other investors in the same region. These benchmarks also provide the investors an opportunity to assess the performance of their investment managers. Moreover, it is equally essential to make these benchmarks as soon as possible so that investors can have more time for the evaluation of the real estate markets.
Multiplication of REITs
The worldwide development of the REIT sector too has played an important part in the growth of the global real estate business. REITs allow a large number of people to invest in the global property market. Around ten years back, only five nations witnessed the presence of REITs. Since then, many countries have adopted this new trend. There are still numerous countries which are thinking about these REITs so it seems that this list will continue to increase. This will open more roads for local and foreign investors as they will get a chance to explore overseas markets through these REITs.
The Japanese version of REITs, known as the J-REITs, has contributed significant amounts to the economy of Japan. A little more than two and a half years after the establishment of the first J-REIT on September 10, 2001, the number of J-REITs quickly increased to 13. In May 2004, these J-REITs had a capital of US$ 11.6 billion. Furthermore, at that time, 14 more J-REITs were planning to step into the market with more than US$ 7 billion of assets. (Chen, Mills, pg. 18, 2004)
Although the history of REITs in the United States goes back to 1960, it was not until the beginning of the 1990s that these REITs started growing in numbers. Afterwards, some of these REITs crossed the $10 billion mark with respect to their assets.
REITs are still rapidly increasing in number on a global scale. Moreover, existing REITs too have experienced a significant growth in their assets worldwide. The growth of these REITs, both in number and in their market value, is not limited to those countries where REITs have existed for a long time. Moreover, there are other countries which are currently considering laws for the establishment of such REITs. This also gives us a hint that this growth will not slow down in the coming years.
A report published in the summer of 2004 revealed that the gross value of the assets managed by the US REITs amounted to “over 10% of the investible real estate universe”. (Chen, Mills, pg. 19, 2004) The report further tells us that the REITs in the USA grew in numbers in 1995 but afterwards, the growth was more in their individual sizes and less in terms of their numbers. Therefore, existing REITs expanded their businesses on a global scale and their capitals increased.
The trend of REITs has also contributed to an increase in the market transparency in various aspects. A significant number of the US real estate has to release information to the public that has led to the increase in transparency. Such information may include up to date rents and evaluation of the estate (although this is not required in the USA). The REIT sector has also initiated numerous RIET market analysts who are responsible for conducting researches and surveys and for preparing reports regarding prospective markets and organizations all over the world. These reports are extremely valuable for the investors since all the current information regarding the real estate businesses worldwide is covered in such reports. Organizations are also required to submit reports to the relevant government departments. This helps in the accountability and the supervision of such organizations. Moreover, REIT market analysts and investors too keep a keen observation on these companies.
Development of Non-listed Investment Funds
The real estate industry has witnessed a rapid growth in the number of non-listed funds which are providing various methods for investments in the global real estate market. For a significant period of time, the United States enjoyed numerous such funds which opened new channels for the investors in the global property business. In the rest of the world, these non-listed funds are still developing to cater the amplifying demand for such funds.
There are many non-listed funds which provide the investors a variety of methods and profit goals. INREV reported that there were 250 unregistered property funds in 2004 compared to 50 in 1995. Furthermore, the GAV (Gross Asset Value) of these funds was € 120 billion in 2004 compared to € 30 billion in 1995. These are the values if we exclude the German open-ended funds. If we include these German funds too, then the Gross Asset Value in 2004 accounted to more than € 212 billion. These non-listed funds provide an opening to those investors who do not want to invest directly for any reason. The same thing is true for Asian countries. (Chen, Mills, pg. 20, 2004)
Growth of non-listed funds in North America has not been as significant as it was in Europe and Asia during the five years from 1999 to 2004. This is due to the fact that the non-listed funds sector was already mature in North America in 1999.
“A survey released by the Washington D.C.-based Association of Foreign Investors (AFIRE) has named Washington D.C. as the best urban real estate market in the world. This marks the third consecutive year that Washington has received the top rating, besting London and Tokyo. AFIRE’s survey is based on member responses from its 160 investment firms in 17 countries.” (Washington DC Best Urban Real Estate Investment, n.p., n.d.)
These positive drifts in the global real estate industry have led to an increase in the reliability, trustworthiness, liquidity, and transparency of the property business on a global scale. These developments have opened new opportunities for potential investors all around the world. Therefore, the global real estate industry is attracting more investors as investments in this business have proved to be secure and stable, if not profitable. Hence, the compulsion to step forward and invest in the global real estate market is becoming more of a norm.
Future Growth plus Performance Driver
Globally, the future of property performance can be asserted by a number of factors, which are natural and continuous. These factors vary with respect to different real estate sectors. Nonetheless, there are two emerging trends which will obviously affect every property sector and are believed to attract attention from worldwide investors.
In this regard, economic growth is a fundamental factor and it will continue to drive demand for property investment. However, demographic changes in this way affect both the demand for numerous options for property investment and the physical demand of property by the users.
History and forecasts indicates that economic growth across the regions and countries will be unequally distributed in the near future. As we discuss the future of real estate industry, we must realize that expansions and contractions in the economy of different nations will definitely influence the future of the real estate industry. On the other hand, the long term economic growth is projected to move in an upward direction. In the past, when most of the countries were affected by the economic downturn, global gross domestic product (GDP) still grew by 2 percent in the year of slowest growth, 2001.
Rising economies usually grow at a speedy pace and with more volatility than established ones. Moreover, significant establishment of wealth along with property wealth and expansion of the middle class will lead to enhancements in the economic growth. Certainly, both of these could potentially have deep effects on the property industry. From the most populated countries in the world like China and India, future of this industry will definitely receive a sustainable boost. Moreover, both countries are experiencing rapid economic expansions and they will consequently become developed economies. They are also more likely to be part of the future growth locomotives. As countries develop, they usually transform from agrarian based economy in the service and consultancy industries. For nearly two decades, this trend has been obvious in Asia, North America and Europe. And in this way, it had significant implications on all major real estate sectors. Obviously, expansion of the service sector will boost the demand for office space if this happens. Higher income and increased purchasing power will support persistent growth of retail sales and also the demand for retail space. In other ways, better living standards will guide both quality and quantity of housing consumptions. Demand for warehouse facilities and modern industrial goods will automatically boost cross border trade.
The other globally significant driver of future of property performance depends on profound demographic changes that will occur in all regions over the next 2 decades. And the effect of these changes will have both physical and financial implications. According to a report published in, “as population age in Japan, the US and most of the western Europe individuals will need investment assets that will provide them with current income, protection from inflation and some expectation for capital appreciation in their retirement” (Chen, Mills, pg.22, 2004). However, in nations where government or pension funds are primarily responsible for employee retirement funding, similar qualities will be necessary except on a large scale.
Physical aspects of several property sectors may also be influenced by aging the populations. Many developed countries including Japan and some European countries are more likely to experience the decline in the overall population. Nonetheless, this trend in real estate industry is unlikely to be positive.
Conclusively, the coming decades are more likely to witness the booming progress of urbanization particularly in the Asian region. This is a natural result of fast economic growth. Besides this, it is interesting to note that in addition to housing a big portion of the world’s population, urban centres in Asia have already a large portion for the investment in real estate.
Finally, demographic changes and long term economic growth on macro level are two of the main future growth and economic drivers in the global real estate. Certainly, their effects will vary form one country to another but both these drivers will be powerful and long lasting. In the end, a well balanced worldwide real estate portfolio seems to be the best way to contribute to the growth in several countries.
Major Benefits of International Real Estate Investment
There are numerous motives that drive an investor to seriously consider the option of investing in the international real estate market. Using this option not only provides the investors a secure source of continuous returns but it gives them an opportunity to take advantage of receiving dividends from upcoming real estate investment trusts too. Moreover, by investing in the global real state market, investors enjoy a broader range of investment tactics. They can also take advantage of wide-ranging types of property possession.
It is extremely important for a 21st century businessman to have modernized information to take advantage of the lucrative business of global real estate investments.
Protection in periods of poor business performance
Talking about the real estate business, earnings can fluctuate between periods time to time depending on the rental or vacancy sequences of the property. These sequences may be similar in a particular country. For example, schools in the Canada may have longer winter vacations compared to schools in Africa where the climate is not that cold. Therefore, chances of a school premises being rented in Canada in the winter season be almost same throughout the country.
The correlations between property earnings and earnings form various other assets are low. The correlation across different locations is significantly lower for property investments as compared to bonds and shares. This tells us that there are more advantages of having an internationally scattered portfolio of property investments than there are for holding bonds or shares.
As the correlation of property earnings in different locations has gone up in the last few years, it is still low as compared to the inter-regional correlations for bonds and shares. Therefore, investing in an internationally diversified portfolio of properties will definitely give a higher return than investing in an internationally diversified portfolio of stocks or shares.
Size of the Global Real Estate Industry
The magnitude of the global property industry is definitely another important advantage of investing in a globally diversified portfolio. The total value of the global private property market was more than US $6.6 trillion by the end of the year 2004. In the public property market too, chances of gaining more advantages increase with the diversification of property assets.
(Chen, Mills, pg. 7, n.d.)
Businessmen can further strengthen their portfolio of missed assets by investing in the real estate industry in various countries. Advantages that are produced by the global diversification of property assets can be categorized into three different fields: separate nations and regions have unique economic cycles, property sector cycles, and wide real estate market cycles. Surprisingly, none of the above mentioned cycles have a strong correlation which increases the advantages of diversification.
Throughout the preceding three decades, most of the economic cycles in Europe, Asia, and North America have not been harmonized.
Liang and McIntosh, in 1999 describe as “the Diversification benefits may be defined as the difference between the return on the market portfolio and the required rate-of-return for the investments”. (Benjamin, et.al, pg, 193, n.d.)
Global GDP growth rate has been broadly scattered for the past few years. IN the near future, differences in the growth cycles of different countries will be there. Asian countries, other than Japan, are more likely to grow with a higher acceleration rate than European or North American countries. Real estate markets in different regions are unsynchronized too as the economic cycles of different countries are.
“The U.S. investor would benefit from international diversification. Except for Canada, asset returns are higher than those for U.S. assets. Though these foreign assets are accompanied by higher risk, the correlations between foreign assets and U.S. stock is less than 0.73 in all cases. Furthermore, foreign real estate has a lower correlation with U.S. stocks than do foreign stocks”. (Conover, et.al, pg.22, n.d.)
When taking into consideration the benefits of investing in the global property sector, the advantages of diversification cannot be overstated. International diversification of a property portfolio can facilitate the security of investors from economic and political insecurities especially if the investor comes from a small or underdeveloped country. Even for US investors, it is advantageous to globally scatter the real estate portfolio. Global diversification can also secure the investors from serious threats such as disasters, economic downfalls, political instability, and terrorist attacks.
Diversifying an international property portfolio across various property segments too can produce better results for an investor. It is extremely necessary to have a sharp eye on different property sectors to guess which one will do better in a given situation.
“A continental factor clearly exists in Europe; in order to find optimal diversification opportunities European real estate investors should look outside their own continent. On average, both North America and the Asia-Pacific region are attractive.” (Eichholtz, pg. 493+. n.d.)
Property Investment as a Globally Traded Asset
A lot of argument has been going on in the literature over the past ten years regarding the advantages arising from the global diversification of property holdings. Two points are very obvious and opposing to each other which arise from this research. The first one is that there are noteworthy advantages that arise from investing in the property business across different countries. The second one that contradicts the first point argues on the risk elimination advantages from diversified investments in the global real estate market. This second point says that the benefits are not noteworthy with respect to investments in other financial instruments. With the continuous boost in globalization of financial markets, diversification on the national scale is not very beneficial to big investors. Investors are now more interested in knowing the advantages of holding property in foreign countries. Therefore, they want to be updated about the risks and benefits of investing in the global market.
“Aida CEO Alex Fenwick said that, Lower demand allows investors room to search out the best buys and wait for the upturn. Traditionally, property moves in cycles of roughly 18 months and if the cycle holds true, investors can expect faster growth in values from the end of this year”. (News detail, n.p., n.d.)
The following few paragraphs will be focused on the summary of the arguments and will put a light on the researches that will be interesting from the viewpoints of both the students and the practitioners. The issue of the benefits from diversified real estate assets depends on the argument that how vulnerable profits are to a downfall in one sector of a globally diversified collection of real estate assets. The extent of fragmentation and combination between these assets is definitely a key factor in the consideration of this issue. If the extent of market integration is more, then the advantages of a globally diversified portfolio will be less. This is because fewer advantages will show up as the same economic and financial motivations will be present. Fund managers care about the incorporation of real estate assets with other numerous financial instruments. Moreover, they take into consideration the connection between the local and the international real estate markets too.
If the local property market is internationally integrated, the motivation to globally diversify the assets will weaken. Property is an asset that has particular risk/profit features. From a national point of view, it is well-known that adding property to a collection of bonds and stocks would definitely lead to better risk/profit sketch. The subject of the advantages resulting from diversified property assets across various nations has been addressed in academic literature only in the past few years although a significant amount of work has been done on the advantages derived from a globally diversified portfolio along with other financial instruments. These contradicting views that have appeared in the literature can be accredited to various reasons. Two important factors regarding this contradiction which need more focus are the direct (physical) real estate investments and the indirect (securitised) real estate investments.
Property investment is usually visualized as obtaining a physical asset. Direct investments, no doubt, are the largest percentage of the total real estate investments in any nation. For a person managing a collection of globally diversified assets, there are numerous problems which need to be taken care of. An example of this would be the magnitude and quantity of these investments. These problems can be solved by investing in a real estate company. This solution is known as an indirect (securitised) investment.
Securitized real estate can be featured as a collection of assets in which various investors may take part in a particular segment of skillfully-managed, profit-generating properties. The United States has the biggest market of securitized real estate market (known as REITs or Real Estate Investment Trusts). From the portfolio management viewpoint, REITs provide a valuable opportunity to institutional investors to solve their problems that they may face if they invest directly. The shares in these REITs can be easily liquefied since there are secondary markets too. The size of the assets does not have significant importance since shares can be traded to fine-tune the portfolio.
The underlying holdings are administered by real estate experts who have proficiency in the domestic market. Transaction expenses are extremely low in comparison to their counterparts in the sale of physical assets (related to the direct investments). There are matters, like taxation, that have to be taken into consideration which can be different for various nations as these REITs conduct their businesses worldwide. For example, in Australia, the real estate trust is looked upon as a totally detached body for taxation purposes. This provides the trust an opportunity to request minimized depreciation rates and interest expenses. Furthermore, shareholders can diminish their taxable earnings by these deductions.
The laws in the United States require 95% of the earnings of REITs to be delivered to their shareholders. In the United Kingdom, real estate organizations are considered the same as other organizations. There are global variations regarding the depth of the real estate organizations’ involvement in the expansion of real estate businesses. We will now take a look at the prospective advantages that investors may enjoy from indirect (securitized) and direct (physical) real estate investments.
Arguments in Favour of Indirect (Securitised) Real Estate Investment
The possibility of globally diversifying securitised real estate investments became achievable just in the preceding few years. A report published in 1996 stated that the total market value of all listed property organizations worldwide was less than $ 20 billion in the middle of 1980s. Compared to this, the total market value rose to around $240 billion in the mid-1990s and consequently, to $ 350 billion by the end of the 1990s. (Wilson, Zurbruegg, pg. 9, 2003) Even though the developments in the securitised investments are new, useful information regarding securitised investments can still be found. The first significant research carried out on this topic was by Ibbotson and Fall in 1979.
Although their research was primarily focused on the gross value of assets, including property, in the USA, it gave new ideas to potential investors regarding the advantages of a diversified, global real estate portfolio. The main aim of this research and other such researches conducted at that time was to analyse the connection between earnings from different assets. These initial studies provided researchers an opportunity and motivation to focus on the advantages of a globally diversified portfolio of properties. These beginning studies came to a conclusion that US REITs and other foreign property equities had a low positive connection. Therefore, the researchers analysed that the emergence on new global real estate entities would make the property portfolio better.
Arguments in Favour of Direct (physical) Real Estate Investment
“Comparisons based on direct (unsecuritised) property is clouded by appraisal smoothing, and `de-smoothing’ procedures have been developed to deal with this issue.” (Wilson, Zurbruegg, pg. 9, 2003) The actual problem is that the threats in property investment are underestimated because of the instability of the overall earnings indices which are based on evaluation. Two factors are responsible for this:
(a) Evaluators consider earlier estimated assessments as well as updated transactions when they evaluate current values; and
(b) Assessments of individual real estate investments are not very frequent and these evaluations are made at different times.
This results in a smoothing effect on the series of physical property earnings and a deep autocorrelation inside the series. There are some de-smoothing methods which try to insert the instability back into the indices. Nevertheless, there is an extent of bias included in the choice of the smoothing coefficient. Therefore, there is no solution to this problem that is totally convincing.
A survey was conducted in five countries – US, Canada, UK, Australia and New Zealand – that evaluated the risks involved in the property investments. The results showed that assessments of the risks which were associated with direct (physical) investments needed an upward correction between 34 percent and 47 percent to explain the appraisal smoothing. (Wilson, Zurbruegg, pg.15-16, 2003) Moreover, these researchers discovered that after taking into account the currency risks, the threats associated with the property estimates amplified to a significant extent for global investors. However, the advantages associated with global property investments still outnumbered the benefits from stocks. The matter of risks in the property business is thought of as a more serious one in contrast to the risks involved in other types of assets.
Furthermore, political risks are also significant with respect to direct investments. Political instability and actions taken by governments can have significant effects on the prices of direct properties. A research (Wilson, Zurbruegg, pg. 16-17, 2003)was conducted that took into account an imaginary American investor with equally distributed property investments in the United States, the United Kingdom, Australia, and Canada during the ten years from 1985 to 1995. Results depicted that variances in the currency rates were beneficial with respect to the property in the UK but they had an unfavourable effect on the property in Australia.
Although there were variations in the effects on a global scale, the overall effect was in the favour of the American businessman. Another study (Wilson, Zurbruegg, pg. 17, 2003) illustrated that physical real estate holdings were more isolated globally compared to other types of assets. The main reasons for this were amplified costs for the extraction of information and for the accomplishment of an internationally assorted strategy.
Arguments against Indirect (Securitised) Real Estate Investment
There are also a few people who are against the global diversification of securitized property. A study (Wilson, Zurbruegg, pg. 18, 2003) analysed the advantages of a globally diversified real estate portfolio. The data used for this study was taken from securitized investments in ten nations in the period from 1978 to 1997. This study did not find any significant proof to support the vision that inclusion of globally diversified property holdings in a portfolio of assets results in a boost in advantages.
Arguments against Direct (Physical) Real Estate Investment
A research (Wilson, Zurbruegg, pg. 23, 2003) showed that global diversification of real estate assets does not have any special benefits. These researchers have guessed that the exposure to threats in this case was primarily because of the international GDP effect although they did not find enough data to defend their analysis. A succeeding study (Wilson, Zurbruegg, pg. 18, 2003), which used evaluation based real estate data collected from 22 nations for the ten years from 1987 to 1997, had enough proof to back the idea of an internationally widespread real estate market. In the beginning, the researchers speculated that the real estate markets should not depend on each other because the markets are restricted to their locations.
Nevertheless, their studies revealed that variations in the value of properties all over the world are correlated with each other. These researchers concluded that the reason for this correlation may be the fact that all these markets are similarly affected by the global economic situations.
“A continental factor clearly exists in Europe; in order to find optimal diversification opportunities European real estate investors should look outside their own continent. On average, both North America and the Asia-Pacific region are attractive.” (Eichholtz, pg. 493+, 1998)
Global Real Estate Investment in Asia
The real estate market has developed significantly in Asia in the past few years. The Asian Public Real Estate Association (APREA) reports that the REIT market in Asia has grown by 34% summing up to more than 80 REITs.
Further growth is guaranteed because of different national and international aspects. Such aspects include upcoming REIT laws in various nations such as Hong Kong and Singapore that will facilitate the operations of these REITs if they invest in the rest of the localities. Furthermore, it will also facilitate the investors outside the Asian continent to invest earlier in Asian REITs.
“Foreign investors are piling into the Indian property market to take advantage of a strong economy and new FDI rules that encourage overseas companies to set up subsidiaries and joint ventures. Yet with bigger investments comes greater risk” (fDi Magazine: Real Estate, n.p., n.d.)
Anthony Green, Head of Property Industry Group in Macquarie´s Corporate Finance Team at the opening day of the conference said, that “The REIT market in Asia, particularly in Singapore, has shot out of the blocks. Asian REITs have enjoyed great success. Managements have performed. Investors are happy and now it will be important to maintain the performance of existing REITs and the quality of the new product.”
(August 05 News – REITs in Asia: Real Estate Investment World 2005 in review, n.p., 2005)
“Syed Fazl-e-Haider said that, the real-estate business has seen a boom in Pakistan in recent years. The property market in the country has benefited from the present government’s commitment to promote Pakistan as an investment choice” (Asia Times Online: South Asia news – Chinese eye Pakistan’s real estate, n.p., n.d.)
“According to the Shanghai city government, the average housing price increased by 15.8 percent in one year. In the central part of the city, the rise was a spectacular 27 percent”.
(Shanghai Real Estate – Investing in Real Estates in Shanghai, China, n.p., n.d.)
According to Steve Carroll, the development of markets in Asia is primarily because of the trust of investors in this market. New rules regarding the operations of REITs in Asia have led to a significant increase in their number. Huge amounts are coming into the Asian market after the introduction of these laws. Moreover, other countless REITs which operate on a global scale have also opened gates to new prospects.
Daniels says, “If you’re interested in owning investment property, start slowly. Make a small investment to see how it works. Your best bet might be to partner with someone in your community who has been doing this for a while” (Korn, pg. 72+, 2003)
Japan secures around 64% of the market capitalization outside the REIT market in Asia. The economy of Japan will carry on its development and will facilitate additional extension of REIT vehicles. Analysts predict that the J-REIT market will undergo a huge boom by the end of the year 2007. Various J-REITs expect to enjoy international boost in their overseas activities in the upcoming years. These vehicles are also looking forward to have partnerships with foreign asset management organizations such as those which operate in Hong Kong, Singapore, or Australia.
Global Real Estate Investment in Europe
“Romania’s economy is combining steadily increasing levels of Foreign Direct Investment (FDI). At more than 4.0 billion Euros, 18% of the CEE region, Romania has taken over as the leading beneficiary of inward investment.” (Romania Real Estate – Investment Property – Economic Statistics for Romania, n.p., n.d.)
With the advent of new REIT rules in the UK and Germany, other European countries too are expecting developments in their markets. On the other hand, Belgium, France, Holland, Bulgaria, and Turkey had already formed REITs or other vehicles similar to REITs in their countries. Finland, Luxembourg, Spain, and Italy are seriously considering legislations fro the introduction of REITs in their countries.
“Researchers found that in almost all European countries real estate returns depended positively and significantly on real estate returns of other European Countries, but not on countries in the Asia-Pacific or North American regions.”
(Zurbruegg, et.al, pg.13, 2003)
European countries have been slow in their progress with respect to the developments of REITs. The main reason for this is that many European countries still do not have any REIT or REIT-like vehicle nor do they have legislations addressing this matter. Investors and real estate companies expect to enjoy various benefits after these new laws take effect. The background is currently favourable for investment in the property industry in the UK and Germany.
“2001 was a relatively good years for the investors on the French rental commercial market. Office rents jumped by 9 percent in average and the total investments in the country increased by 50 percent on an annual basis from $6, 5 billion to $10 billion. This means that in 2001 the market have experienced a slowdown after the more robust increases in 2000 (more than 10 percent)”. (Real Estate Investment in France, IRED.Com, n.p., n.d.)
“It has been estimated that Middle Eastern money accounted for some 11% of the total foreign investment in UK commercial property, having grown from about 4% in 2004.” (Current trends in Shariah property investment)
“Investment opportunities in Italy are many, but they are changing and many industries are repositioning themselves in a dynamic market. Two areas for investment in Italy have, however, undergone very little change. If anything, they have become more attractive and better organized in recent years. These are the markets for real estate and for tourism and hospitality services”. (Investing in Italy, n.p., n.d.)
”According to US real estate agents, buying real estate in Bulgaria in the near future is one of the most profitable investments in the world right now”.( Best Real Estate Investments in the World – Bulgaria, n.p., n.d.)
Moreover, there are various features in the UK that make it exclusive compared to other countries. It is relatively a small nation with a scarcity of land and it has an intense market. Nevertheless, there are still issues which must be solved. The most important one is that the status of only listed real estate assets can be changed to REITs. Therefore, only those companies which are listed had the option to transform into REITs from the day of implementation of the new REIT legislation. Various organizations look at this restriction as an obstruction in the new law. Another big obstruction is the shareholder 10% decree. Usually, this directive permits a particular shareholder to hold a maximum of 10% of the total shares of any particular REIT. This led to a huge uproar from those organizations which have valuable shareholders who possess more than 10% of the shares.
“There is a wave of excitement about REITs in Europe, with new REIT legislation taking effect in the United Kingdom on Jan. 1, 2007 and in Germany in early 2007. These two countries join Belgium, Bulgaria, France, the Netherlands and Turkey, who had already established REIT or REIT-like structures in Europe. Other countries, such as Finland, Italy, Luxembourg and Spain, are reportedly contemplating REIT-like legislation as well.” (NAREIT – Feature, n.p., n.d.)
Anyhow, the latest directive permits stockholders to possess more than 10% shares if the earnings from the dividend are distributed in a different manner. This facility is only for corporate stockholders. The second half of the year 2007 will definitely witness new developments in the REIT industry in Germany and in the UK after the implementation of REIT legislations in these countries.
“The EU Spring Economic Report estimates that Hungary ‘s GDP will exceed the overall EU average by approximately 50% over the next two years. Direct Foreign Investment increased 20 per cent from 2003 and many major multi-national companies have made significant capital investments in Hungary” (Hungary Real Estate – Real Estates in Budapest, Hungary, n.p., n.d.)
Risk and Risk Management
As we shape a case in the benefits of worldwide real estate investment by pointing out the good-looking features, we should consider present positive trends of the real state business too and most importantly the future driver for the investment with respect to asset investment. Furthermore, we are aware to a certain extent that property investors might still be worried with respect to the benefits outweighed by the impediments to the non domestic investment. Thus, it is significant to have a broad understanding of different risks involved in worldwide investment in general and global property investment in particular.
“Property has historically been a less volatile investment than equities. Partly, this is because of the high proportion of the total return from property that is provided by income. But there are other factors, including the effect of long leases and upward-only rent reviews that still generally apply.” (An introduction for IFAs to Real Estate Investment Trusts – REITs, n.p., n.d.)
Likewise, worldwide property investments in bonds and stocks are not resistant for constraints and risks. Amongst those which are often mentioned are overcomplicated legal systems, geopolitical risks, arcane tax-structures, lack of benchmarks and transparencies, variable foreign exchange rates and illiquidity, unfamiliarity with foreign markets, and so on.
Sometime it becomes unavoidable when investors wish to gain higher returns of investment with lower risk involvement. However, others are frequently misinterpreted and commonly overstated. Yet we have discussed the most commonly marked risks with respect to global real estate investments which include persistent changes in foreign currency, illiquidity and certainly, and lack of knowledge.
Lack of Domestic Knowledge
It seems that the property market will remain limited to small areas full of peculiar features because of the soar pace of globalization. Generally, investment properties are specific to their locations and it is interesting to note that no two assets are identical. Consequently, their market worth and performance are intrinsically influenced by domestic market dynamics.
Another important point that should be taken into consideration is that investment property markets all around the world have different ownerships. Zones and tax laws are the important points that must be considered before investment. As a matter of fact, restrictive zone areas can inhabit development. In this regard, tenure and title which are straightforward in many countries for instance the US, Canada and the UK may be murky among many countries as can enforceability of contracts like bankruptcy, covering leasing and lending. In general, international tax laws can create hindrances for international investors. Also accounting practices vary form nation to nation. In this respect, it is extremely important for investors to have knowledge about a country’s tax policies and incentives.
Other hurdles that foreign investors have face consist of local traditions which vary from place to place, cultural differences, business running procedures and so forth. In this way, foreign investors perceive foreign investments more risky than investing money in their own country because of lack of knowledge about ongoing international market trends. Not surprisingly, an investor must learn and analyze the culture, politics, nature of market, tax, accounting methods; opportunities for foreign investors, money return analysis, trends, and many other things before investing money in the international property market.
Furthermore, there is no doubt in it that the presence of foreign investors embarks domestic investors to invest their money in a competitive way. However, lack of knowledge can create hindrances during the entry of an investor in the global real estate market.
Foreign investors can solve this problem by starting their businesses with domestic partners who have knowledge about different things and this would be a great strategy. Certainly, with respect to the global real estate investments, sound information plays a significant role in searching out and sorting out the places where to invest money and in what way? Can it be a joint venture business or partnership?
Currency Risk Factor
Currency risk is a huge factor in investing money in the global real estate industry and it can be a real flaw of the instability for foreign assets. In addition, it is very difficult to hedge an asset against currency risk. In present days, there is an abundance of financial instruments which allow useful currency hedging. However, the costs associated with the evaluation procedures are not negligible. Therefore, while evaluating currency risk, an investor should apply balancing principles between acceptable risk and cost efficiency.
Besides this, some institutional investors in present days such as pension funds of worldwide companies may have some kind of liabilities in foreign currencies and will certainly want to hedge in a different manner.
How Investors manage currency risk factors?
Definitely, an investor can cope with it. At first, outline a well-balanced real estate portfolio. The currency risk is partly and efficiently diversified away. This is because of the fact that depreciation on assets is generally offset by appreciating another object with it.
Secondly, in portfolio management technique, the use of financial derivatives has become a regular practice in evaluating money risk factors. But in present days, real estate investors and managers have just begun to use these financial tools in risk management analysis. However, income returns on real estate allow less complex currency hedging
The third point is that movements in foreign exchange currency can become a favorable part for foreign investors. Because of this fact, diversification advantages to local investors and extra profit opportunities increase. However, investors in global market should be worried about their purchasing power in the long run and not in the investment nominal returns.
In the end, global attempts to boost economic integration and effectiveness may also result in decreased currency risk in forthcoming investment activities. For instance, twelve European nations deploring the currency risk for cross border investments within the European territory because of the currency adoption. Besides this, while discussing this issue, a question arises that should European investors choose to use financial derivative techniques in order to hedge currency exposures all over the Europe?
If we look at the US property market, we will find that in the US, some real state markets are quite small. Hence, they are more liquid than those in the US because of the shortage of buyers and sellers. Notwithstanding, the US property market is the biggest market in the world. On the other hand, markets of lower size are marked by low transaction volumes.
In addition to this, there is a lack of credible assessment process and limited free float in ratios in the property especially in public sector. Because of this fact, it is very difficult to keep a check in and check out in the domestic level market particularly when the time is not favoring.
However, some of them, until now, are uncommon and unheard in developed countries because it is an obvious risk for property investment in some emerging nations, significantly, in financial and political crises. According to a research conducted by Dr Lijian Chen and Thomas I mills for UBS, global asset management liquidity risk is limited in 25 core real estate markets. In this regard, diversified advantages can be attained with only limited number of nations and or securities.
Hence, an investor who is worried about liquidity matters on this business can select investment countries which are politically stabled. Besides all these ground breaking realities, one can argue that a sound, diversified, worldwide real estate investment portfolio should be considered the most effective way to deal with liquidity risks.
The probability of internationally synchronized liquidity crises is slim. In this way, property investors in the long term investment prospectus should provide enough liquidity over the time while diversifying away unwanted domestic level risks.
It is also interesting to note that opportunistic property investments, aiming illiquid property markets, can be a good strategy in which liquidity is supplied in lacking periods. For instance, assets are sold out as liquidity returns to the property market in banking crises.
Investments in foreign countries are exposed to greater risks even if the investor takes necessary precautions. However, using intermediaries with a worldwide reach and a domestic presence can help mitigate enormous amounts of idiosyncratic risk.
Investment in property business has always considered as profitable business. To make this business more reliable and successful now it has an authentic structure in the shape of Real Estate Investment Trust (REIT) is an organization that is formed to facilitate companies & individual investors to invest in Real Estate business. These are normally listed companies. It distributes 90% of its income to the investors. It is design to provide such structure to the investor that is based on mutual funds as they have in Stocks & brokerage companies. We have three kinds of REITs First one is Equity REIT which only involve in purchase, rental and development of properties. Second one is Mortgage REIT which is more towards financing purchases in property sector. The third one is Hybrid REIT which is having features of both pervious types of REITs.
REITs in different Countries
Most of the following countries have found REIT as a beneficial organization in their investment sector. In Australia this kind of investment started in early 1970s now this sector has being facilitated by many REITs. In Canada, REITs were established in 1993 and by the 2007 budget they have been exempted from certain taxes. REITs in Germany are also in its initial stage and The Ministry of Finance realizes importance of REITs in the country and paining to introduce German REITs by this year. Beside Germany, India is also willing to have smooth circumstances to start REITs operations in the country. Japan established its REIT as (J-REIT) in Dec. 2001 and they have major development in REITs since then. As REITs started in United States the investor are keen to invest in this sector as REITs are distributing 90% of the income to their investors
REITs started its operations in Jan 2007 in United Kingdom have got huge boost when 100 FTSE members switch over to REITs including some of the major companies like British Land Liberty International, Hammerson, Slough Estates, Land Securities, etc. British REITs are distributing 95% of their income to their investors.
Above picture clearly shows that till year 1994 there were only four countries had REITs in operation (establishment years mentioned in picture), and Canada had REITs matter in consideration.
(Chen, Mills, pg. 7, n.d.)
The above picture can give some idea of REITs growth in different countries around the globe in last decade or so. Now REITs operating national has gone up from four to eleven till year 2005, (establishment years are mentioned in picture). Israel had this matter legislative status. The remaining countries had REITs foundation in consideration and UK from them has recently started REITs in country in Jan. 2007 (this picture show statistics before 2006).
REITs consider attractive investment option among investors because they are facilitated by specific tax structure same as mutual funds. The trust usually does not pay corporate tax on income distributed to its investors, to make this tax reduction applicable the REITs must distribute more than 90 percent at least of their income.
“Charles Beer, Head of Real Estate at KPMG said, that Several quoted UK property groups now seem likely to convert into REITs in 2007” (United Kingdom: Real Estate Investment Trusts, n.p., n.d.)
“Reita programme co-coordinator Dave Butler said: “The tax transparency of REITs investment is very attractive when compared with other investment vehicles, but it is complex and we feel both advisers and private investors will benefit from this clear and simple guide. Tax should not be the first reason to choose an investment, but with the increasing popularity of property investment, the REIT tax advantages are good news for UK investors.” (Tax Guide Highlights Benefits Of Real Estate Investment Trusts – A free guide to the tax treatment, n.p., n.d.)
Economic Benefits of REITs: –
REITs are not good only for individual & institutional investors but it pays an important role in contributing in country’s economy. This industry is providing modernization in establishing towns and cities to increase quality and standard of living and on the other hand it is a productive tool for a business person to associate with this industry by investing money on long term profit basis. It helps in improving liquidity, capital allocation to create value for both the investors and its occupiers as compare to REITs competitors. REITs operating countries have major influence on their Gross Domestic Product (GDP) growth rate. REITs, encourages efficient and effected ownership & capital allocation that is beneficial for its assets performance. The payment of higher profit ratio as dividends is more reliable as a factor of value.
Yield Benefits of REITs: –
REITs Companies are considered are higher Yield in their profit distribution.”In September, 1999, the Royal Host REIT benefited from a $10 million private placement that provided some extra financial flexibility. With a total payout of $1.12 per unit last year, Royal Host offers an attractive cash-on-cash yield of 22%, which exceeds its distributable income.” (Hawkins, n.p., 2000). This is also a stable business and it maintains its growth level as it involves investing in different properties at the same time on different location domestically and country wide so it have less margin of future income failure.
“The fastest growth has been in banking, financial services and insurance which have grown nearly five-fold over the period, from falls, firms substitute these for property. Thus demand for commercial floor space might fall despite an increase in output.” (Ball, pg. 41, n.d.)
Diversification Benefits of REITs
Diversification element in REITs, the process to combine individual investments where their profits are not linked deeply together i.e. they might not be reinvested over time and REITs do not have single profit generating mechanism if someone has increment in his investing value other person’s investment may go down, so this mechanism reduces instability and risk from the business as a whole. Investors are realizing the importance of diversification in their investment. The conventional fixed income investment system doest let investor to increase their income as they have to protect themselves future risk by investing more to gain additional income. REITs offer a new way to its investors increase their returns without taking more risk.
A research shows REITs offer handsome threat/returns in transactions and the correlation of other assets types with REITs has go down over last 3 decades. Due to diversification characteristic REITs are able to boost income or reduce threat aspect. REITs have important consideration as an addition in different types of stock businesses. (Invest in REITs: Reasons to Invest)
The objective of diversification in REITs is to minimize the risk in investment for maintaining the steady level of profit. It is achievable because the declination in correlations with other investment types provides huge supports to this system.
Highly Paid Dividend in REITs: –
The most charming and attractive feature for the investor to invest in REITs is their profit distribution rate. REITs usually pay more then 90% of their taxable income to their investors in the form dividend per year. This dividend rate has massive difference as far has regular stock dividends are concern so high ratio of profit distribution increases investors satisfaction to his investment.
REITs in United Kingdom: –
“Foreign investors also made significant indirect (portfolio) property investments in the UK by purchasing significant blocks of domestic public property” (Titman Sheridan, pg, 343+, 2006)
The new investing channel in UK for investing in residential and commercial property started in January 2007 called REIT real estate investment trust. This channel is getting popular group of people from professional investment. As other types of investment it also has advantages and limits so it might be appropriate in some cases and not all. Its distributing income varies because of volume of investment, management quality and intensity of its costs & expenses.
After successful establishment in different countries around the world REITs mark its foot steps in United Kingdom relative late. UK REITs must be authorized as other UK investment trusts and usually a listed company. A REIT wont pays taxes on profits shareholders pay taxes on their own. Due to which A REIT must distribute more than 90 percent of its income.
“A REIT or UK Real Estate Investment Trusts work in a similar way to a PIF or Property Investment Fund. A Trust made up of many investors’ pooled funds may be used to purchase income property, and are then traded on the major exchanges in the same way as stocks”. (UK Real Estate Investment Trusts, n.p., n.d.)
The commercial property always gives option to gain higher income. In last five year the rental income has maintained higher level in UK as far as overall market is concern and has increment in prices as compare to fixed stock deposits or bonds. The commercial property provides capital growth with stabile rate of inflation. The investment in commercial property in past years shows its probable reduction in business risk due to which investors gets smooth returns in general situations. The commercial property provides capital growth with stabile rate of inflation. The investment in commercial property in past years shows its probable reduction in business risk due to which investors gets smooth returns in general situations.
“UK GDP grew by 0.7% between July and September, compared with the previous quarter. A rate of just 0.6% had been expected by forecasters. This takes the annual growth rate up to 2.8%, boosting chances that the Bank of England will raise interest rates soon”. (UK and Overseas Property Investment News and Analysis provided by Jet-to-Let Magazine UK GDP growth beats expectations, n.p., n.d.)
Residential properties have different financial phase from other stock investments and also defers from commercial properties. A big part of investment income in residential sectors usually comes from rental. The owner of residential property usually does not experience income itself because his occupation on property but his is facilitating by living in rent free accommodation and utilizing the amount that could spend to pay rent in his other purchases. The residential rental income for the investors in UK contribute small part in property rental income overall as compare to commercial sector. The reason is residential sector contains small properties fulfilling small demands of public sector while the commercial sector is supported by large institutions from the market.
“On average UK property prices have increased by 100%+ every decade in the last 100 years. Chronic housing undersupply means that there is still room for significant growth. In addition to this, Government figures show that by 2010 up to 40% of UK households will be occupied by single people”. (1st Property Investment | Residential Investments in UK Property | profile, n.p., n.d.)
The income and gain of REITs are free from any internal taxes where many of the UK’s open and close ended investment trust dealing in property may pay up to twenty two percent tax of their rental income. REITs careful tax structure minimizes this liability of investor.
Benefits in Other Countries
“Ghana is a nation that offers an investor an unrivalled wealth of choice and potential, and a property investor considering this emerging market will likely be overwhelmed by the weight of opportunity for profit and gain”. (The Benin Epilogue Part I: Africa-Ready for Business: Real Estate Investment in Africa, n.p., n.d.)
Us Real Estate Facts
“According to data compiled by Private Equity Real Estate, the leading magazine covering the global real estate investment industry, private equity real estate funds have raised a total of US$59.5 billion in 2006, far surpassing the US$37 billion raised in 2005” (Private Equity Real Estate Funds Raise US$60 Billion in 2006, n.p., n.d.)
South African Property Market
“The South African property market has regularly been in the headlines over recent years. The spectacular prices caused by the recovery of the rand have seen investors and second home owners profit very well from their investments” (Property Frontiers | South Africa, n.p., n.d.)
As the economies of different countries become more correlated with each other, the integration between international markets has also increased. Therefore, the world has become flat in many aspects. This is the time for the international property sector to emerge as an organized, well-developed global industry. More research is required on each and every aspect of the global real estate industry. With the flow of time, investors will enjoy an increase in the global awareness of the benefits and prospects of this lucrative business and hopefully, more countries will adopt legislations for REITs. Moreover, further researches will pave the way for more relevant and current data with respect to the global real estate market and its comparison with other global businesses. Moreover, we have gone through many aspects of global real estate business in this paper. We also discussed the basic concept of REITs and the benefits associated with them with more focus on the REITs in the UK. As the advantages of REITs come to the knowledge of investors worldwide, chances of their development will increase on a global scale.
Due to the dissimilarities between public and private property, investors should not focus on just one of these two forms. Indeed, they should invest in both these sectors. This will lead to greater benefits as their portfolio will be diversified with respect to the property sectors too. We have explained why the global real estate business has experienced a boost in the last decade and hopefully, this trend will continue.
“2006 experienced record level volumes of global real estate investment with a 40% increase in investments in 2006 from 2005 amounting to a record $900billion total investment. The lion’s share of global real estate investment continues to be traditionally commercial real estate which accounted for $682billion in 2006, a surge of 38% over 2005, and nearly double 2003 volumes.” (Surge in Global Real Estate Investment- Overseas Property Bog: guide to international real estate investment, n.p., n.d.)
The real estate business is anticipated to develop into a more stylish, complicated, established, pioneering, apparent, and a closely controlled business which would be answerable to the investors to a greater extent.
Loeffler said, “I have been watching the same bubble for 20 years. Sarasota has the quality of life, the arts, location, environment and resort living everyday. Investment opportunities are not going to stop.” (Loeffler, pg. 11, 2005)
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