One of London’s newest skyscrapers, affectionately known as ‘the Gherkin’, has just become the UK’s most expensive office building after German-listed property firm IVG Immobilien bought it for a staggering £630m (€956m) from former owner Swiss Re. The acquisition is a 50/50 joint venture between IVG and UK investment bank Evans Randall. IVG, which manages some €18bn in property assets, intends to place around 50 per cent of the property asset with private investors through a closed-ended real estate fund, whereas Evans Randall will give institutional investors access to the other half.
The deal marks yet another record in real estate prices, showing the sector remains strong as investors seek more exposure to the asset class. It also reflects the importance of cross-border property investments, one of the main drivers behind the rise of property prices globally.
A recent report by Standard & Poor’s on the global property and the real estate investment trusts (Reits) markets, shows that despite the strong performance in the equity markets, last year property investments managed to deliver higher returns than stocks. In 2006 the S&P/Citigroup Global Property and World Reit indices grew 41.4 per cent and 39.1 per cent respectively, compared to the 21.8 per cent return of the S&P/Citigroup Global BMI index.
“The listed property market has seen tremendous gain over the last seven years,” says Alka Banerjee, vice president at Standard & Poor’s index services. “In the short-term you may see some pull back because [the sector] has gone up a lot and it is possible there would be some profit taking but over the long term I think globally the market is set to grow.”
The report shows European property was the star performer in the developed world with their European property index up to 68.7 per cent for the year. However, according to Ubbe Strihagen, international director at Aberdeen Property Investor, “it hasn’t been all roses across Europe”. He explains that although countries like the UK, Norway and Ireland have down well, others like Germany are still lagging behind. “The picture for property returns in 2006 is much more diversified than one might think,” he comments. “Looking at 2007 we see a good property market pretty much everywhere [in Europe]. We are very positive about the Nordic market which we think will outperform the European average. We think the UK will do OK and Germany will continue lagging.”
Although the European real estate market is a well-established one, the introduction of Reits legislation in countries such as Germany and the UK is expected to boost further growth. According to S&P much of the European property gains registered last year were related to the introduction of UK Reit regulation - which came into force only last month - as investors priced in expectations that several property companies would convert to Reit status. So far nine property companies, with a combined market capitalisation of over $70bn (€54bn) have been granted approval to convert to Reits status and more will follow over the coming months.
The introduction of Reits legislation in Germany is expected to release more than $150bn of real estate assets into the stock market over the next few years, according to Ms Banerjee.
Although still far behind the mature US and Australian Reit markets, Europe is starting to catch up. “In Europe the Reit structure has become popular only over the last three years but it is gathering a lot of following very quickly,” she says.
“The real attraction [of Reits] is for the property companies themselves and for retail investors and eventually private equity companies who see good valuations in Reits companies,” she comments. “Pension funds have been investing all along a percentage of their funds in property and would naturally shift to Reits as more and more property converts to these structures.”
Mr Strihagen says institutional investors are likely to show interest in gaining exposure to real estate through Reit-type structures. “But I think we’ll also have strong growth in other real estate vehicles and structures, these being listed, unlisted, closed-ended or open-ended property funds.”
He says that strong interest of investors in diversifying their property portfolio internationally, and in the asset class in general, are the drivers behind the proliferation of investment products with exposure to property assets. “We will see a lot of developments in terms of derivatives, index-linked, niche property funds and funds of funds,” he says.
At S&P, Ms Banarjee comments: “It is true that the market is getting very crowded with different investment vehicles and different ideas all revolving around the concept of property investment and Reits. I think in the next few years there will be some rationalisation. Some of these ideas will go away and a few, those with the best exposures, will remain.”
