These are good times for Europe 's real estate market. Since the beginning of the century, the markets of , , and the have been buoyant if not booming. Now there is evidence that amid a general economic upswing, 's property market - at €3trn Europe 's largest - is recovering after four difficult years. The expected launch of real estate investment trusts (REITs) in and the on January 1 should help to keep the party in European real estate going. Experts believe that, within a decade, a REIT market worth up to €100bn could spring up in each country. REITs will be especially welcome in , as companies, insurers and pension funds can finally divest their massive property holdings in a tax-efficient way. And if these investors want to remain engaged in real estate, German REITs will be an attractive option due to their liquidity and, again, taxprivileged status.

 

Even without REITs, European investors with longterm liabilities like pension funds are generating the

 

returns they need with real estate. The traditional way

 

is to invest directly in property. But this strategy is

 

falling out of favour as it does not afford enough

 

diversification in terms of risk or opportunity.

 

To increase their diversification, pension funds, particularly

 

those in , have begun to invest

 

heavily in real estate funds. There is, however, a third

 

strategy which competes with the fund approach:

 

investing in quoted companies that do one or more of

 

the following: buy, develop manage and sell real

 

estate.

 

Fraser Hughes, research director at the European

 

Public Real Estate Association (EPRA) says: "Real

 

estate securities are suitable for the ‘buy and hold'

 

strategy of institutional investors, including pension

 

funds. Over a medium to long-term investment horizon,

 

they will generate usual real estate-type returns."

 

Hughes also says the companies have an advantage

 

over funds in that they can offer a higher degree of

 

flexibility and diversification.

 

"An investor in real estate securities decides on the

 

entry and exit points in investing in a company, without

 

having restrictions placed on investment. And a

 

global strategy, where one invests in a diversified

 

portfolio of stocks, can provide exposure to many

 

quality management teams and thousands of buildings

 

around the globe."

 

Numerous real estate securities trade on major

 

European exchanges. Better-known examples are

 

British Land , which trades on the London Stock

 

Exchange (LSE) and IVG Immobilien, which is on

 

Frankfurt 's stock exchange.

 

Beneath the blue-chips, there has also been an

 

explosion of the companies on the Alternative Investment

 

Market (AIM) - the LSE's sector for growth

 

stocks. Out of the 72 real estate securities listed on

 

AIM, 60% have joined just since early 2005.

 

In a way, real estate securities can be thought of as

 

‘pre-REITs' as all of them are, in theory, eligible for

 

the vehicle's tax-privileged status. Indeed, according

 

to the British Property Federation (BPF), the bluechips

 

traded on the LSE plan to become REITs when

 

the relevant legislation takes effect on January 1.

 

Those on AIM will, on the other hand, be initially

 

barred from REITs, as the government feels that

 

they are not established enough and do not face the

 

same stringent listing requirements. David Melhuish,

 

assistant director of finance at the BPF, says, however,

 

that the government "has not completely shut

 

the door and we are doing our best to lobby ministers

 

to include them at a later stage".

 

Experts point out that while REIT status may boost

 

institutional investment in AIM-listed real estate

 

securities, it is currently not very significant. "Institutions

 

have big volumes to invest - let's say €1bn. If

 

they invest that money in AIM companies, they wind

 

up completely owning a dozen of them. This is completely

 

contrary to their strategy of being a silent

 

investor interested only in steady returns," says

 

Oliver Mihm, chief executive of Investors Marketing,

 

a Frankfurt-based consultancy for the financial services

 

industry.

 

According to Mihm, another barrier to big institutional

 

investment in AIM-listed real estate securities

 

is the fact that they offer little diversification - which

 

is why these investors would consider the asset class

 

in the first place. "I think the boom on AIM has

 

mostly been driven by the firms' wish to capitalise on

 

the excellent property market," he says.

 

Meanwhile, established real estate securities have

 

attracted a good deal of investment from pension

 

funds, especially those in the . Agood

 

example is ABP, a €194bn pension fund that serves

 

Dutch civil servants. Another is health care fund

 

PGGM, where the securities account for at least 2%

 

of its €71bn in total assets.

 

Of the 12% ABP allocates to real estate, twothirds

 

have gone to the securities, though this may

 

include REITs, which have existed in the

 

since the 1970s. In its last annual report, ABP

 

listed four Dutch firms, five American and one from

 

the as the top ten real estate securities it was

 

invested in. ABP also holds shares in British Land .

 

Patrick Kanters, managing director of real estate at

 

ABP, echoes Hughes'comments about the advantages

 

of real estate securities. "Actively selecting

 

listed real estate enables us to expose ourselves to

 

various attractive investments and a broad spectrum

 

of investment styles and strategies."

 

The picture for German pension funds, however, is

 

different. Unlike their Dutch peers, which began to

 

shift away from a strategy of investing directly in real

 

estate in the 1990s, German schemes have only begun

 

to do so this century. Amain reason was the market

 

slump that began in 2001 but ended this year.

 

To remain engaged in real estate, German pension

 

funds have turned to German institutional funds

 

called Spezialfonds. Some recent examples are BVV,

 

a €17.7bn scheme for 's financial industry,

 

as well as two pension funds for physicians: the

 

€7.5bn scheme NAEV and the €6.85bn scheme

 

AEWL.

 

An AEWLspokesman said: "We tend to prefer

 

Spezialfonds as they afford us a great deal of transparency

 

and allow us to influence the investment

 

process."

 

In a Spezialfonds, the pension fund can either work

 

with external managers or pool its money with other

 

investors to invest in properties internationally.

 

AEWLsays it relies on the latter approach, which

 

accounts for 10% of its total assets. The other 10% it

 

allocates to real estate is directly invested. According

 

to Georg Reul, board executive at IVG Immobilien,

 

Spezialfonds are popular among German schemes

 

because they are safe investments and not as costly to

 

maintain in their portfolios as real estate securities.

 

He says: "Moreover, real estate securities do not

 

necessarily offer more diversification than Spezialfonds.

 

There are, for example, securities that are simply

 

specialists.

 

"Perhaps the biggest advantage of the securities is

 

their greater liquidity. The securities may also generate

 

higher returns than funds, but they are also more

 

volatile."

 

Beyond its core business of buying, developing and

 

selling real estate, IVG has a majority stake (50.1%)

 

in Oppenheim Immobilien KAG (OIK), Germany's

 

leading provider of real estate Spezialfonds. The

 

other partner in the venture is German private bank

 

Sal. Oppenheim. On the other hand, some German

 

real estate experts point out that by going with

 

Spezialfonds that do not have external managers, the

 

schemes may not get the same access to levels of professionalism

 

as they would with real estate securities

 

and REITs.

 

Mihm says: "If the investors chose the option of not

 

working with external managers in a Spezialfonds,

 

they will again be responsible for the properties they

 

buy. In this case, they will have to hope that they have

 

selected the right objects."

 

In any case, Mihm and Reul agree that once German

 

REITs are launched, they will definitely compete

 

head-on with Spezialfonds for the schemes'money.

 

"REIT status will definitely be attractive to German

 

pension funds owing to their tax-privileged status,"

 

says Reul.