Thursday, June 28, 2007


A Rocky Start for British REITs - New York Times

Long popular in the United States, REITS are only now being created by legistlatures in the UK. They were met with much fanfare and high expecations.

But, the British REITs have disappointed investors, so far. What is happening and what is wrong?

I'm sure the prohibitively high tax rates are to blame. That is the bane of existence for British and European companies.

AFTER much fanfare, legislation creating real estate investment trusts in Britain, one of Europe’s biggest property markets, took effect on Jan. 1. Almost immediately, nine of the country’s largest real estate companies converted to REITs, while five others made the switch soon after and a handful more plan to follow suit by year-end.

In the months leading up to the big debut, expectations ran high, with the hope that Britain’s already-strong commercial real estate industry would further flourish. A REIT market, after all, could attract more investors globally and make it easier for the local companies to raise capital. (The corporate structure gives real estate investment trusts favorable tax treatment in exchange for disbursing most of their income to shareholders as dividends.)

But all of that enthusiasm has since turned into disappointment. British REITs are among the worst-performing real estate investments so far this year, according to industry analysts, with sinking share prices and dividends that are comparatively lower than those of their global peers.

“Here’s a U.K. REIT that says, ‘Buy me, I yield 2.5 percent,’ ” said Jeremy M. Anagnos, the co-chief investment officer of CB Richard Ellis Global Real Estate Securities. “But here you have a very astute property investment base, and they know what they could get elsewhere.”

The average dividend yield on REITs worldwide, in fact, is roughly 4 percent, versus around 2.5 percent for British REITs, according to Mr. Anagnos. In the United States, the dividend yield is around 4.3 percent, according to the National Association of Real Estate Investment Trusts.

Although some money managers are steering clear of the nascent British market for now, others say they are finding value in some of its shares. Many REITs now trade on the London Stock Exchange at deep discounts — from 5 to nearly 15 percent below net asset value, according to Eric N. Roseman, the president of ENR Asset Management in Montreal — perhaps making some of them ripe for takeovers. By contrast, most REITs globally tend to trade at a premium relative to the value of the properties they own, Mr. Roseman said.

During a visit to New York City early this month for REIT Week, an annual conference sponsored by the National Association of Real Estate Investment Trusts, Liz Peace, the chief executive of the British Property Federation, urged investors in the United States and elsewhere to be patient.

“The message,” she said, “is this: Don’t write off the British market; we’ve only been around for a few months.”

In recent years, Britain’s overall commercial real estate market has had a solid track record, with shares of real estate companies returning 33 percent, annualized, in the three years through 2006, and 48 percent last year alone, according to Ms. Peace, who attended the conference with a contingent of British REIT executives.

The president and chief executive of the American REIT association, Steven A. Wechsler, said that “to a large extent the market there had already factored in the conversion to REITs,” and he offered his own support. “I don’t think there is anything particularly important in terms of what happens in the first few months,” he said. “REITs are a long-term investment.”

Some managers of mutual funds — through which average investors in the United States can gain exposure to global property markets — say they think that it may take a while for Britain’s REIT market to gain its bearing, as it has for recently established REIT markets elsewhere.

“A few years ago, they never even heard of the ‘REIT’ term,” Mr. Anagnos said. Now, more than two dozen countries worldwide have public REIT markets or legislation in place or under consideration to create them.

“France has had four modifications of the REIT model in the last five or seven years,” said Samuel A. Lieber, the manager of the Alpine International Real Estate Equity fund, which has 11 percent of its holdings in British property companies.

In Britain, Mr. Lieber said, “it will take five years or more for companies to rebalance and orient themselves toward cash-flow generation as opposed to net asset value growth.”

It is that focus on asset growth, he and others have said, that is partly responsible for the low dividends. “British companies historically have not been focused on cash flow,” Mr. Lieber said. “REITs in general are excellent distributors of real estate cash flow.”

The British market has also been adversely affected by higher interest rates, Mr. Roseman said. He noted that last month, the Bank of England again raised its base rate, to 5.5 percent, to help keep inflation in check. “You don’t want to buy anything that’s interest-rate sensitive,” he said.


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