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Global Real Estate securities – Where do they fit in the broader

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					Global Real Estate securities – Where do they fit in the broader market?

By Fraser Hughes & Jorrit Arissen, EPRA

September 2005

The real estate investment market is increasingly global. It seems that a growing number
of real estate operating companies and Real Estate Investment Trusts (REITs) are
investing cross border. In addition, listed real estate investment managers are continuing
to role out multi-region/global investment products. This globalisation trend begs the
question: what is the size of the investment grade, or high quality commercial1 global real
estate market?

The methodology
It is clear that we cannot value every individual building and combine their values to arrive
at a figure for the total global real estate universe. However, we can estimate the size of
individual country commercial real estate markets using a Gross Domestic Product (GDP)
top down approach, and aggregate their values to arrive at a total global estimate. Of
course, individual countries are in varying stages of development, therefore, we must
adjust country estimates to account for the economic situation. With regard to the sample,
we selected 49 countries from four separate regions: Asia-Pacific, Europe, Latin America
and North America. In developed countries 2 high quality commercial real estate
represents approximately 45 percent of GDP. In developing countries 3 this figure is lower.
We based our estimates on a formula devised by Prudential Real Estate Investors.4


                     The Formula:

                     For developed countries:   REi = GDPi x 0.45
                                                                             1

                     For developing countries: RE = GDP x 0.45⎛ GDH i ⎞
                                                                         3
                                                 i     i      ⎜        ⎟
                                                              ⎝ 20,000 ⎠

                     Where:
                      REi   = Country high-quality commercial real estate value

                     GDPi     = Country Gross Domestic Product
                     GDH i = Country Gross Domestic Product per capita

Figure 1: The Prudential Formula

We used weighted average GDP figures from the World Bank Organisation for the years
2001, 2002, 2003 and 2004. The years are weighted 10, 20, 30 & 40 percent, with the
lightest weighting applied to 2001 and the heaviest to 2004. The weighted procedure
dampens the effects of GDP and currency fluctuation. The latest 2004 population figures
were used to calculate GDP per capita5. We adjusted the Hong Kong and Singapore
markets by doubling, or using a factor of 100 percent to adjust for density issues and the
UK market was re-valued up by 25 percent to take into account the heavy presence of the
London market. The full table of results can be viewed in figure.6. It is worth noting that
the table does not attempt to assess the ‘invested’ universe. In other words, the real
estate that is of suitable investment grade, and held directly by investors6.

1
  Not including residential property.
2
  In this analysis,”developed countries” are classified as those countries with GDP per capita greater than
US$20,000.
3
  “Developing countries” are classified as those countries with GDP per capita less than US$20,000.
4
  “A Bird’s Eye View of Global Real Estate Markets” – Prudential Real Estate Investors, Dr. Youguo Liang &
Nancy Gordon. March 2003.
5
  Liang & Gordon used weighted averages for GDP, and GDP per capita, in their March 2003 report for the
years 1999 through 2002.
6
  For further reading in this area see: “An Inventory of the investible market in 11 European countries”
Hordijk and Ahlqvist, 2004.



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Top 15 Real Estate Markets
Figure.2 shows that the total size of the global real estate market is estimated to be nearly
US$14.5 trillion. No surprises that the United States has by far the largest real estate
market in the world. The estimated size of the US market is approximately US$ 5 trillion,
or in other terms, one third of the world’s high quality commercial real estate is located in
the United States. Japan ranks second with around US$2 trillion, followed by the four
major European economies. The German market is approximately US$1.1 trillion, with the
UK just behind at approximately US$1 trillion. France is close to US$800 billion. Italy is
approximately US$660 billion. Canada comes in at just under the US$400 billion mark.
The top 15 countries comprise around 88% of the total global real estate market.
Interestingly, the top five countries hold 68% of the total. The next ten countries add 20%
and the remaining 34 countries make up the final 12%.

                          GDP ($ Bn)       GDP per capita        Real Estate
Countries                    ($ Bn)            ($ Bn)              ($ Bn)          Weight Cumulative
United States                  11,105                37,897             4,997       34.42%   34.42%
Japan                           4,370                34,316             1,966       13.54%   47.96%
Germany                         2,388                28,977             1,075        7.40%   55.36%
United Kingdom                  1,847                30,641             1,039        7.15%   62.52%
France                          1,757                29,075               791        5.45%   67.96%
Italy                           1,461                25,162               657        4.53%   72.49%
Canada                            879                27,046               396        2.72%   75.22%
Spain                             840                20,863               378        2.60%   77.82%
Hong Kong/China                 1,618                 1,239               288        1.98%   79.80%
South Korea                       612                12,689               237        1.63%   81.43%
Australia                         516                25,937               232        1.60%   83.03%
Netherlands                       508                31,122               229        1.57%   84.61%
Mexico                            654                 6,235               200        1.38%   85.98%
Switzerland                       320                42,995               144        0.99%   86.98%
Belgium                           304                29,413               137        0.94%   87.92%
Other Countries                 5,596                  -NA-             1,754       12.08%  100.00%
Global Total                   34,776                                  14,519      100.00%
Figure 2: Top 15 Real Estate Markets Globally.
Sources: World Bank Organisation, FTSE, EPRA.

Figure.3 (reading from left to right), is split into four separate ‘asset classes’, or investment
categories. The first category is all commercial real estate. At a regional level, total
commercial European real estate, Europe is the most heavily weighted at approximately
38 percent of the total market. North America just falls behind at around 37 percent, with
the Asia-Pacific region a long way off at 22 percent. Latin America makes up
approximately three percent of the total. Focusing on the second section of figure.3, the
composition is very different. This section details the total listed7 real estate markets.
North America leaps head and shoulders above the three other regions. North American
listed real estate comprises 47% of the global total. Asia-Pacific makes up 34%, with
Europe lagging significantly behind at 18%. Latin America has no real listed real estate
market to speak of. Section three, the FTSE EPRA/NAREIT 8 free float market
capitalisation percentages, pushes the North American market still further (54%), at the
expense of Asia-Pacific (27%). Europe adds one percentage point (19%). Adjustments for
free float play an important role. In the FTSE EPRA/NAREIT Global Real Estate Index,
the North American region has a weighted average free float figure of 96 percent, Europe
is 82 percent and Asia-Pacific is 78 percent. In addition, the differences highlight the focus
and maturity of the United States and Canadian REIT market. Asia-Pacific loses ground,
mainly because of the diversity of the Hong Kong market. Many Hong Kong real estate
companies are involved in other ‘non-real estate related’ activities, making them non-
7
   The estimated market value for the stock exchange listed real estate is based on equity market
capitalisation. The figures do not include leverage, and therefore do not include the total size of the
property portfolio owned by the company. For example, in North America leverage is in the range 35-55%,
Europe (including UK) 80-100%, and Asia-Pacific 40-60%.
8
  The FTSE EPRA/NAREIT Global Real Estate Index Series is widely seen as the leading benchmark for
investing in real estate securities. To ensure the tradability of the index, companies must meet a number of
criteria such as a minimum level of free float market capitalisation, traded volume, a minimum level of real
estate related activities and provide annual accounts in English. The Ground Rules of the index are
available from http://www.epra.com.



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eligible for the index. We expect this to change in the future under Hong Kong REIT
legislation9. The fourth and final category examines the global stock market breakdown.10
North America comprises the largest portion (46%), followed by Europe (30%) and Asia-
Pacific (22%). Latin America is 2 percent of the global total.


                           60%
                                  Asia-Pacific
                                  Europe                                                                     54%
                                  Latin America
                           50%    Nth America
                                                                             47%
                                                                                                                                        46%



                           40%         38%
                                                      37%
    Percentage Mkt Share




                                                            34%

                                                                                                                          30%
                           30%
                                                                                            27%


                                 22%                                                                               22%
                                                                                                  19%
                           20%                                    18%




                           10%

                                                 3%                                                                             2%
                                                                        0%                              0%
                           0%
                                    All Real Estate          Listed Real Estate             EPRA/NAREIT Global           Stock Market
                                                                                  Asset Class

Figure 3: Market Share Breakdown under Asset Class Category.
Source: EPRA Estimates, Bloomberg.

Figure.4 attempts to highlight the differences between each regions natural GDP
weighting against its weighting in each of the four asset categories. Reading from left to
right again, in the first section, we see that the European and North America total
commercial real estate markets are more mature than their Asia-Pacific and Latin
American friends.11 Both markets are three percentage points in excess of their GDP
weightings. Moving on, section two highlights the fact that listed real estate in Europe is
significantly underweight (17 percentage points (pp)) compared against its far heavier
GDP weighting. Both North America (13pp) and Asia Pacific (9pp) come in well above
GDP weightings. Latin America is 5pp under. Looking at weightings in the FTSE
EPRA/NAREIT Global Real Estate Index, Europe remains significantly behind. Asia-
Pacific loses ground because of the free float and activities diversification issue, but still
remains two pp above its GDP weighting. North America moves 19pp ahead of its GDP
benchmark. The final stock market comparison sees North America 12pp head, with half
of the expense (6pp) being paid by European stock markets. Both Asia-Pacific and Latin
America are three percentage points under their natural GDP weighting.




9
   REIT legislation offers conglomerates the opportunity to spin off buildings into a REIT. For example, the
Hong Kong Housing Authority plans to IPO the Link REIT valued at US$2.7 billion later in 2005.
10
   Stock market capitalization estimates include the value of company real estate. Therefore, in this simple
exercise we will have effectively double counted real estate. For example, in Europe’s largest economy –
Germany, UBS estimate that approximately 20% of the market capitalisation (€600 billion) of the DAX 30 is real
estate held at book value. In addition, over two percent of global stock markets are comprised of dedicated listed
real estate trust/operators – see Figure.6.
11
   This outcome is, of course, the result of applying the GDP per capita adjustment factor in the formula.



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                                            20%                                                                                19%
                                                    Asia-Pacific
                                                    Europe

                                            15%     Latin America
                                                    Nth America                             13%
                                                                                                                                                          12%

                                            10%                           9%




     Percentage Mkt Share relative to GDP
                                             5%
                                                         3%          3%
                                                                                                             2%

                                             0%

                                                               -2%
                                                                                                                                                  -3%
                                                   -3%                                                                               -3%
                                            -5%
                                                                                      -5%                                -5%
                                                                                                                                            -6%

                                            -10%



                                            -15%

                                                                                                                  -16%
                                                                               -17%
                                            -20%
                                                     All Real Estate      Listed Real Estate             EPRA/NAREIT Global                Stock Market

                                                                                               Asset Class

Figure.4: Relative Market Share Breakdown under Asset Class Category.
Source: EPRA Estimates, Bloomberg.

Securitisation Levels
The largest levels of securitisation are experienced in the Asia-Pacific market. Figure.5
displays the eligible countries of the FTSE EPRA/NAREIT Global Real Estate Index,
ranked according to their percentage of listed, or securitised real estate. Australia tops the
list. Australia has a well established Listed Property Trust (LPT) market attracting
investment from both institutional and retail investors 12 . Over ten percent of the total
market capitalisation of the Australian stock market is in the form of LPTs 13 .
Approximately 27 percent of the Hong Kong/China total real estate market is listed, with
Singapore not too far behind (26%). Similar to Australia, the Singapore stock market has
approximately ten percent of its market capitalisation in the form of real estate focused
stocks. The listed market heavyweight, the United States, is just over the seven percent
mark, in terms of total real estate listed, contributing approximately two and a half percent
to total stock market capitalisation. Canada achieves comparable figures to the United
States. In Europe, from the larger countries, approximately five percent of UK real estate
is traded on the stock market, equating to around 1.7 percent of the FTSE All-Share.
France’s figures are just behind the UK. Interestingly, Germany looks significantly under-
developed on the listed side, with less than half a percent of total German real estate
traded on the stock market. The German listed real estate market comprises 0.45% of the
total German stock market. The envisaged introduction of the German REIT structure in
2006 is expected to change the face of the German securitised market over the next five
years.14 Taking a simple average, on a global basis, around 6% of total estate is traded
on global stock markets, contributing to approximately 2.5 percent of stock market
capitalisation.




12
   UBS estimate the institutional/retail split to be approximately 65/35 respectively.
13
   Again, it is worth noting that these figures are an under estimation, as many non-real estate specific
companies will hold real estate on their balance sheet. This applies to all countries in the table.
14       14
   UBS estimate that the German REIT will be launched in the second or third quarter of 2006, to be enacted
respectively from 1 January 2006. The impact on the European sector could be significant. The IFD estimate that
$70 billion of equity from tax paying companies is 60% free float weighted, and then Germany would leap from its
current weighting of 3% in the FTSE EPRA/NAREIT Europe Index to approximately 30%. The effect on a global
basis would be that Europe increases to approximately 25% of the global real estate market.




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                                                          Real Estate          Real Estate
             FTSE EPRA/NAREIT Countries                    % Listed            % of Stk Mkt
             Australia                                          30.24%                10.67%
             Hong Kong/China                                    27.46%                 5.84%
             Singapore                                          25.98%                 9.29%
             Luxembourg                                         12.48%                 5.94%
             Sweden                                              9.90%                 3.54%
             Canada                                              7.49%                 2.62%
             United States                                       7.18%                 2.32%
             Netherlands                                         6.49%                 3.36%
             New Zealand                                         5.61%                 5.21%
             Austria                                             5.14%                 4.62%
             United Kingdom                                      4.59%                 1.66%
             Japan                                               4.23%                 2.24%
             France                                              3.47%                 1.56%
             Switzerland                                         3.07%                 0.63%
             Spain                                               2.94%                 1.71%
             Belgium                                             2.90%                 1.51%
             Finland                                             1.61%                 0.61%
             Norway                                              1.58%                 0.88%
             Poland                                              1.47%                 1.34%
             Denmark                                             1.09%                 0.63%
             Greece                                              0.96%                 0.58%
             Italy                                               0.90%                 0.79%
             Germany                                             0.49%                 0.45%
             South Korea                                         0.39%                 0.18%
             Hungary                                             0.19%                 0.16%
             Ireland                                             0.00%                 0.00%
             Portugal                                            0.00%                 0.00%
             Czech Republic                                      0.00%                 0.00%
             World                                               5.66%                 2.29%
Table.5: Securitisation levels of the FTSE EPRA/NAREIT Global Real Estate Index countries.
Source: EPRA.

Developments
Faster growing developing economies such as China, India, the Eastern European
countries and Latin America will achieve growing shares of the total global real estate
market going forward. These countries are increasing their higher-quality commercial real
estate at quicker rates than the developed economies. In addition, companies who have
historically developed and invested in the mature economies are expanding out into
developing regions. At the listed real estate market level, REIT legislation is set to push
growth in Europe, as it has done historically for the North American market during the
nineties, and is currently doing so in the Asian region. It is estimated that the market
capitalisation (currently US$565 billion) of the FTSE EPRA/NAREIT will reach US$1
trillion in the next five years15. In the mature REIT markets such as the United States, the
Netherlands and Australia, the build up of capital over the years has led to a trend for
management to seek opportunities outside the borders of their domestic market. For
example, Westfield, the largest global listed real estate trust, is listed on the Sydney stock
exchange, but currently holds over 60 percent of its portfolio outside of Australia.

Summary
It is clear that Europe is significantly underdeveloped in terms of securitised real estate,
compared against Asia-Pacific and North America. Germany is the prime example of this
underdevelopment, with only half a percent of the county’s high quality commercial real
estate available to investors on the stock market. However, changes in tax legislation are
set to address this situation. Continuing levels of cross border investment will drive
harmonisation in the industry, forcing higher levels of transparency and governance in
developing countries.

15
     Pan-European REIT – A long, long road. EPRA Article, August 2005.



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Real Estate markets are highly dynamic. From developing markets such as India, China
and Eastern Europe, to changes in tax legislation in developed countries. These are
exciting times for companies and investors alike. As real estate continues to establish
itself as an intrinsic part of a broad investment strategy, investors demand a broad range
of real estate investment products. From investing directly, using non-listed real estate
funds, to trading REITs/real estate operating companies on global stock markets. It is
widely envisaged that global listed real estate markets will continue to grow in the future,
offering a broader range of opportunities to investors. We expect the market capitalisation
of the EPRA/NAREIT Global Real Estate Index is to break the US$ 1 trillion barrier in the
next five years.


Figure.6
                                                                   30-Jun-05       30-Jun-05      30-Jun-05        30-Jun-05
                       GDP            GDP           Real Estate       Total         Total RE     Stock Market       Stk Mkt
Countries             ($ Bn)      per capita ($)      ($ Bn)      Listed ($ Bn) v Listed RE (%)     ($ Bn)      v Listed RE (%)
Japan                     4,370           34,316          1,966             83.2           4.23%         3,705            2.24%
Hong Kong/China           1,618             1,239           288             79.1         27.46%          1,354            5.84%
South Korea                 612           12,689            237              0.9           0.39%           529            0.18%
India                       583               548            79              0.3           0.33%           450            0.06%
Australia                   516           25,937            232             70.3         30.24%            659           10.67%
Taiwan                      292           12,840            113              4.9           4.31%           502            0.97%
Indonesia                   231               970            38              1.8           4.74%             81           2.22%
Thailand                    145             2,238            31              5.7         18.18%            107            5.37%
Malaysia                    106             4,509            29              8.3         28.41%            187            4.41%
Singapore                    97           22,204             87             22.6         25.98%            243            9.29%
Philippines                  80               923            13              4.1         32.19%              35          11.94%
New Zealand                  79           19,862             36              2.0           5.61%             38           5.21%
Vietnam                      40               480             5              -             0.00%           -              0.00%
Total Asia-Pacific        8,769           20,758          3,155           283.1            8.97%         7,891            3.59%

Germany                  2,388            28,977          1,075            5.3           0.49%          1,188            0.45%
United Kingdom           1,847            30,641          1,039           47.7           4.59%          2,863            1.66%
France                   1,757            29,075            791           27.4           3.47%          1,756            1.56%
Italy                    1,461            25,162            657            5.9           0.90%            757            0.79%
Spain                      840            20,863            378           11.1           2.94%            650            1.71%
Russia                     462             3,162            112            0.5           0.41%            339            0.14%
Netherlands                508            31,122            229           14.8           6.49%            442            3.36%
Switzerland                320            42,995            144            4.4           3.07%            704            0.63%
Belgium                    304            29,413            137            4.0           2.90%            262            1.51%
Sweden                     300            33,360            135           13.3           9.90%            377            3.54%
Turkey                     244             3,546             62            1.1           1.80%            104            1.06%
Austria                    252            30,843            113            5.8           5.14%            126            4.62%
Norway                     222            48,459            100            1.6           1.58%            178            0.88%
Denmark                    211            39,010             95            1.0           1.09%            165            0.63%
Poland                     216             5,604             64            0.9           1.47%             70            1.34%
Greece                     173            16,227             78            0.7           0.96%            128            0.58%
Finland                    162            31,012             73            1.2           1.61%            193            0.61%
Ireland                    153            38,501             69            -             0.00%            100            0.00%
Portugal                   146            13,893             58            -             0.00%             64            0.00%
Czech Republic              91             8,847             31            -             0.00%             38            0.00%
Hungary                     83             8,248             28            0.1           0.19%             34            0.16%
Romania                     59             2,635             13            -             0.00%             16            0.00%
Ukraine                     53             1,094              9            -             0.00%             23            0.00%
Slovakia                    33             6,137             10            -             0.00%              5            0.00%
Slovenia                    28            13,844             11            -             0.00%              7            0.00%
Luxembourg                  27            58,574             12            1.5          12.48%             26            5.94%
Bulgaria                    20             2,662              5            -             0.00%              2            0.00%
Total Europe            12,361            26,670          5,527          148.4           2.69%         10,615            1.40%

Mexico                     654             6,235           200             -             0.00%            220            0.00%
Brazil                     535             2,904           126             0.5           0.41%            339            0.15%
Argentina                  146             3,733            38             0.5           1.30%             58            0.84%
Venezuela                   99             3,963            26             -             0.00%              7            0.00%
Colombia                    86             2,041            18             -             0.00%             30            0.00%
Chile                       79             5,017            23             0.3           1.26%            123            0.23%
Peru                        62             2,250            13             0.0           0.28%             22            0.17%
Total Latin America      1,662             4,383           444             1.3           0.30%            798            0.17%

United States           11,105            37,897          4,997          358.8           7.18%         15,477            2.32%
Canada                     879            27,046            396           29.6           7.49%          1,129            2.62%
Total Nth America       11,984            37,101          5,393          388.4           7.20%         16,606            2.34%

World                   34,776               -          14,519           821.3           5.66%         35,910            2.29%
Sources: World Bank Organisation, FTSE, EPRA.




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