REITs have become an increasingly popular vehicle for real estate ownership on a global scale. Worldwide, REIT market capitalization now stands at approximately €1.5 trillion, up from €673 billion in 2010, according to London-based multinational professional-services firm EY. Most telling is that since 2010, the market capitalization of non-U.S. REITs has more than doubled.
Today REITs trade on the stock exchanges of 36 countries and comprise a majority of the 30 largest listed real estate companies in the world. In particular, retail REITs occupy several key positions. Among them are U.S.-based Simon, the largest global REIT; France-based Unibail-Rodamco SE, the largest publicly traded company in Europe; U.S.-based General Growth Properties; and Australia-based Scentre Group.
“Going back a few decades, I don’t think I foresaw the REIT industry’s propagation around the world to the extent we’ve seen,” said Steve Wechsler, president and CEO of NAREIT. “It’s a very pleasing development.”
Retail REIT investors have been pleased with a 65.6 per cent return over the past five years, according to Chris Hudgins, a senior analyst with S&P Global Market Intelligence. Retail REITs in Japan, known as J-REITs, saw a 116 per cent return over that same period, versus a 78.6 per cent return for U.S. retail REITs.
Since its spinoff from Westfield Group in 2014, Australia’s largest retail REIT, Scentre Group, trades on that stock exchange and owns properties in both Australia and New Zealand. Most recently, the firm reported strong earnings through the first three quarters of 2016, with sales up by 3.4 per cent and funds from operations expected to grow by 3 per cent for the full year. Scentre Group has been on a development binge, thanks to a pipeline valued at A$4 billion (about €2.8 billion), having recently completed two major redevelopments totalling €450 million at Westfield Warringah Mall, on Sydney’s lower north shore, and at Westfield North Lakes, in Brisbane.
Westfield Corp., the international division of the former Westfield Group (and, with Scentre, the other spinoff), has two major redevelopments under way in London: the £1 billion (about €1.2 billion) Westfield London and the €1.6 billion Westfield Croydon, in South London. In Italy it is developing the 167,000-square-metre Westfield Milan mall with venture partner Gruppo Stilo.
In Japan, the world’s second largest REIT market behind the U.S., the Bank of Japan has increased its direct support for the sector and now owns slightly more than 5 per cent of the shares in a dozen J-REITs. Japanese REITs offer an average 3.1 per cent dividend yield, which helps explain why the REIT share of listed real estate in Japan has grown from 32 per cent in 2010 to 43 per cent today. More Japanese retail-focused property firms are expected to go public with REIT offerings in the near future, following the lead of Kenedix Retail REIT Corp., which owns 41 neighbourhood shopping centres across Japan and listed on the Tokyo Stock Exchange in February 2015.
The nine retail S-REITs of Singapore saw distributions per unit fall by 3.4 per cent in the third quarter of 2016, though they were projected to stay resilient through the rest of the year in the face of rising supply and potentially weaker retail demand, according to ratings agency Fitch. The market’s largest REIT, CapitaLand Mall Trust, owns 16 shopping malls across the country and saw gross revenue and net property income increase by 6.5 per cent and 6.8 per cent, respectively, through the third quarter.
European REITs still represent a relatively small portion of the global REIT market, according to Philip Charls, CEO of the European Public Real Estate Association (EPRA). Today 12 of the 28 EU member states have a REIT regime, and both Ireland and Italy have recently adopted new or revised REIT regulations. “We are looking at a volatile period, with general elections in Germany, France and the Netherlands in 2017 and populist sentiment growing across Europe,” said Charls, “but REITs are first and foremost an income story, and they have been delivering stable income.”
The dividend yield for European REITs has averaged 4.3 per cent over the past five years, and retail is the second largest sector of the FTSE EPRA/NAREIT developed Europe index, offering an average return of 10.9 per cent over the past five years. EPRA is actively involved in Poland, where REIT legislation is currently under development. “We are talking here about the eighth largest economy in Europe and a market of 38 million people,” said Charls. “The economic growth in Poland is projected to be 3.4 per cent in 2017 against an average of 1.5 per cent for the euro-zone area, so this is definitely a market to watch closely.”
Europe’s largest REIT, Paris-based retail REIT Unibail-Rodamco, accounts for a significant portion of the FTSE EPRA/NAREIT global ex-US index. It reported a 5 per cent increase in revenue for the first nine months of 2016. Gross retail rental income was up by nearly 10 per cent for the period. Unibail is now developing one of Europe’s largest retail projects, the €550 million Mall of Europe, in Brussels, as well as a 184,000-square-metre mixed-use project in partnership with the city of Hamburg. Both are scheduled to open in 2021.
A major wild card for Europe, and specifically the UK, is the result of the June 2016 Brexit vote, in which a majority of UK residents voted to leave the EU. “It is crystal clear that investors did not like the Brexit vote,” said Charls. This is evidenced in the returns of UK retail REITs, which fell by 30 per cent, year to date, through October 2016, versus a 4.4 per cent drop for the euro zone. “We shouldn’t forget that REITs are structured to appeal to income investors, and here the picture is very similar: The UK’s dividend yield at about 3.4 per cent is close to other European peers at 3.6 per cent,” said Charls. “This is what counts to investors in the long term, and will support the attraction of UK REITs regardless of Brexit.”
Charls says he believes that listed real estate’s debut on Sept. 1 as a stand-alone sector in benchmark global equity indices could attract an estimated €75 billion of investment inflow into European property stocks alone in the coming years. Real estate became the 11th industry sector in the Global Industry Classification Standard (GICS) for equity indices, which is the reference for stock indices compiled by MSCI and S&P. This results from real estate being extracted from its previous position within financial stocks, which should result in much lower levels of volatility, or risk, for investors and also highlight the positive dividend income yields that REIT structures provide.
NAREIT’s Wechsler says he thinks China is poised to become a leader in the next wave of countries to adopt the REIT structure. “China is on a path towards REITs,” he said. “How and when is an open question, but I think key actors in China are seriously looking at the possibility, and we see a lot of positive signs.” In a sign of things to come, the first REIT sponsored by a China-based retailer, Beijing Hualian Department Store Co., got listed on the Singapore Stock Exchange in December 2015 as BHG Retail REIT.
Ultimately, global retailers are likely to be among the key drivers in the growth of retail REITs on a global basis. “Providing options for retailers across the globe is a smart strategy for some retail REITs,” said Jim Sullivan, president of the advisory group at real estate research firm Green Street Advisors. “But global investing does introduce complexities. Dealing with foreign currency exchange issues, taxes and different legal regimes are the primary challenges that any property owner investing outside their home countries will face.”