EPRA's Fraser Hughes

GlobeSt.com: Is the privatization off US REITs a cause for concern in Europe?

Hughes: My personal view is that it is not. Our concern as an association firstly is encouraging individual countries to adopt REIT structures and offer more product in the listed market.

GlobeSt.com: But how do you view the US contraction against the expansion taking place around the rest of the globe?

Hughes: Around the world you have REIT structures in different stages of maturity. In the US, the market is consolidating, but they've come to Asia only recently and in Europe, it's still in its infancy. It's difficult to compare consolidation in one market with the developments in other markets, only because of the period of time the relative structures have been in place. At the moment in Europe and Asia, it's only natural that we're going to see companies come to the market rather than come away from the market. That's not to say that, 15 years down the line when the markets are mature, you won't see that level of consolidation. Of course it all depends on the underlying fundamentals.

GlobeSt.com: It seems more a matter of fundamentals than maturity.

Hughes: Then look at the product that's available. While the US has a lot more property in the public domain, there is no hugely developed listed market in Europe. But we do have a huge underlying real estate market. In fact, the European market pooled together is larger than it is in the US, but we don't have the intensity of listing that you have. On average only about 3% or 4% of property is in a listed, securitized format.

GlobeSt.com: There have been published reports about a decline in UK stock prices and how it might impact the rollout of REITs. Is this a concern?

Hughes: If we see a huge pullback, it certainly won't make it attractive to float new REITs, but we've seen the markets perform very well over the past five years. At some point there will be some sort of profit taking or pullback, but listed real estate is a long-term play for investors. If you look at pension-fund allocations around the world, on average it's 6% or 7%, and if you ask some of the pension funds about their target allocations, they tend to be a bit higher. So I would argue that we have to offer more product to the market and expand the opportunity for pension funds in a way that will allow them to reach their target allocations. In the short term you'll always see more volatility in stocks than in the bricks and mortar themselves. We're not telling our investors to trade this week and get out next week.

GlobeSt.com: In the rollout of REITs, where does the European market stand today?

Hughes: France introduced them in 2003, the UK of course started this year. Germany is expected sometime this year. The feedback we're getting from the market is that it will be quite soon. In Italy they say they will be in place the first of July of this year. So the major economies of Europe will have adopted REITs. And there are discussions taking place about starting them in some of the smaller economies.

GlobeSt.com: And what is the outlook for REITs in the UK?

Hughes: At the moment there are nine companies that have REIT status. It's the majors--Land Securities, British Land, Hammerson--they have all adopted the structure and certainly as we go through the year you'll see more and more companies take on the structure. McKay Securities has said they would adopt the structure in the first half.

But the big question is what will happen further out. Will we see more IPOs? We do envision that. In the UK we already have quite a well-developed listed market--around 8% or 9% of the total--but that shows that there is still some way to go in terms of new IPOs.

The real growth in the short term will happen in the German market, which has the largest underlying real estate stock in Europe. But only around 2% or 3% is listed now. This compares to the 10% in the US--at least that's what it was before consolidation. In Germany, you're probably looking at between 80 and 120 billion euros of market cap coming into the sector. So you will see some growth in the UK but it won't equal the kind of growth you'll see in the German market.

GlobeSt.com: At a press conference held here the other day, CB Richard Ellis executives said that REITs have contributed to the explosion of cross-border trading. How do you respond?

Hughes: You've seen an attitude of diversification coming increasingly into play. How many new mandates do you see for investors going global? If you're looking at the direct property transaction, the Aussies are big investors outside the region. And we're seeing a lot of US money coming into Europe, both in terms of listed property companies and the private side, a lot of which is going into Germany. If you have similar structures in place around the world, it's all transferable. At a very general level, the REIT structures around the world tend to be the same. There are some anomalies, such as the tax issues US investors face trying to get into Spanish companies. But on the whole the structure is what investors understand.