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US-style real estate trusts seen in the UK

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EUROPE - US-style publicly quoted real estate investment trusts should be available in the UK within the next few years, according to property expert Alex Catalano.

“Up to now, the UK government has resisted authorising these quoted vehicles. But I believe that the pressure is now too great and we will be seeing them in a couple of years,” she said at the IPD/IPF property investment conference in Brighton last week.

The arrival of REITs in the UK would have real impact on bringing equity capital into the UK market. “Then the real estate market will have will have direct access to individual investors, as the REITs do in the US, where they form a 173 billion-dollar sector,” said Catalano, who is a contributing editor to Estates Gazette in London.

Last year only 1.3 billions pounds of new equity went into the UK property market, while 17 billion pounds was in the form of debt. She saw an increasing shift to commercial mortgage backed securities (CBMS) and conduit lending within the UK real estate area.

“Over the next 10 years I expect to se REIT-type vehicles and CBMS become very significant markets in their own right. This will bring some welcome transparency on both the equity and debt side of money into property.”

On the debt side she pointed to what she called some “uncomfortable figures” for the market. The loan to value ratio has shot up dramatically to 95%. “At the height of the last property boom it didn’t go over 66%.”

Her concerns about the high leverage in UK commercial real estate was echoed by Colin Lizieri of the University of Reading, who pointed to the loans books reaching some 93 billions pounds, equivalent to 2.4 times the 1990/1 peak that coincided with a market crash.

Discussing the possibility of a UK REITs vehicle in the near future, he said: “The proclaimed benefits of a UK REIT structure, however weakly founded, may lead to firms and investors delaying action pending a firm structure and timetable for the ‘holy grail’.”

For example, they may hold back from taking a property company private given the potential to convert to a REIT structure in future.

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