By John J. Kriz, Niel Bisset, Clara Lau, Philip Kibel, Merrie Frankel, Terry Fanous and Takuji Masuko of Moody's Investors Service

REITs and other types of public real estate companies have become increasingly prominent participants in the commercial property business around the world. More and more nations are discovering the benefits of REITs—transparency, liquidity, more permanent management and corporate structures, simpler tax structures, easier access to all forms of capital including unsecured debt, greater overall property market efficiency—and are altering their laws to create REIT-like vehicles to realize these benefits. Recent years have seen Japan, France, Singapore, Korea and Hong Kong join the REIT bandwagon. Moody's expects more nations to create REITs, with Mexico, Taiwan and the United Kingdom seemingly next on deck.

However, not all REIT-like vehicles are created equally. Here is a brief overview of publicly traded REIT activity in various countries and regions.

Australian Listed Property Trusts: Clear Leaders

The Australian Listed Property Trust (LPT) sector is the best established of the REIT-like vehicles around the world, and makes a significant contribution to the stock market and the overall property industry in Australia and New Zealand. Since their formation in 1971, LPTs have evolved into one of the most developed REIT-like structures around the world. The capitalization of LPTs represents around 8.5 percent of the Australian stock exchange. The sector is dominated by five LPTs, which together make up around 40 percent of the sector's market capitalization. The top 10 LPTs make up more than 65 percent of the sector. LPTs control nearly half of the institutional quality commercial real estate in Australia. There are 80 listed LPTs and other property firms in Australia, with a total market cap of over $50 billion.

LPTs have developed as a popular investment choice, which is driven by their stable, predictable earnings and dividend yields. As such, LPTs are viewed as defensive investments. The continued growth in Australia's compulsory pension savings schemes has increased the appeal of LPTs as a liquid, dependable and current-income investment choice.

The LPT sector exhibits high standards of transparency and disclosure. However, unlike the U.S. model, Australian LPTs have traditionally maintained a mix of internal and external management structures, although there is a trend towards internally managed structures as part of LPTs' desire to draw closer alignment between the interests of managers and investors.

LPTs tend to fund their growth through a combination of debt and equity, including dividend reinvestment plans. Bank credit facilities continue to be a major portion of debt funding, although public debt issuance—predominantly in the domestic market—should increase in importance as consolidation activity raises concentration risk for banks. LPTs are large and regular bond issuers.

The major credit themes for LPTs revolve around the challenging operating environment, especially in the office sector, and the continued consolidation that has been driven by the maturity of the LPT sector and the realization that size and diversity provide the best advantage for attracting capital.

Recently, consolidation went into high gear with the merger of Westfield's three trusts—namely Westfield Trust, Westfield America Trust and Westfield Holdings. With this merger, Westfield is the world's largest and most diversified retail property trust, with 123 properties and over 9.6 million square meters (31.5 million square feet) of gross leasable area.

Other key themes include the continued rise in the sector's financial leverage, LPT managers' increasing appetite for overseas investments (particularly in the U.S.) and the eventual implementation of international accounting standards.

East Asia: Rapid Evolution

REITs have been rapidly evolving in East Asia, and changing the landscape of the real estate industry. Governments in the region have generally supported the development of REITs, as they seek to provide better liquidity, transparency and capital access to their real estate industries. Today, Singapore, Hong Kong, Japan, and Korea have REIT regulations in place. Malaysia is reviewing the REIT rules that it set in the early 1990s, while Taiwan is finalizing its regulations. Taiwan has 28 listed firms, with a total market cap of U.S. $3.5 billion.

Property market valuation and financing is starting to be transformed by the development of REITs. Bank financing has been the major source of funding, and REITs have facilitated the active tapping of funds from both debt and equity markets. Furthermore, investors have begun to realize the strong correlation among yields, rent and capital value, whereas the past focus tended to be on capital appreciation.

Sample of Global Public Real Estate Companies
Country	# of Companies	(U.S. Million $) Market Cap
United States	173	$238,833
United Kingdom	33	$43,165
Japan	12	$39,280
Australia	18	$33,871
Hong Kong	10	$27,677
Canada	24	$12,803
Netherlands	8	$12,125
France	6	$9,913
Sweden	8	$5,243
Singapore	7	$3,211
Switzerland	5	$2,671
Spain	2	$2,338
Germany	3	$2,012
Italy	4	$1,979
Austria	1	$1,619
Belgium	2	$1,561
Finland	2	$697
Greece	1	$131
Total	319	$439,127
Source: NAREIT; EPRA/NAREIT Global Real Estate Index. Data as of April 1, 2004.

Singapore is a leading country in REIT development. Since the successful listing of its first REIT, CapitaMall Trust, in July 2002, three other REITs have been established: Fortune REIT, Ascendas REIT and CapitaCommercial Trust. Market capitalization of the "S-REIT" sector, which includes retail, office and industrial assets, is about S$4 billion (U.S. $2.3 billion). S-REITs have adopted acquisition-led growth strategies, with CMT and Ascendas having swiftly expanded their asset size to over S$1 billion (U.S. $584.1 million) since their listings. Since the beginning of 2003, Ascendas and CapitaMall have raised close to S$400 million (U.S. $233.6 million) in public equity capital, and S-REITs have issued nearly S$900 million (U.S. $525.6 million) in CMBS since 2002. We expect more REITs to be established in Singapore, building on these successes. Singapore has 31 listed property firms in total, with a total market cap of U.S. $18 billion.

Hong Kong has yet to see its first REIT. However, it is believed that the Hong Kong Housing Authority will be the likely pioneer as the first REIT. Hong Kong has a huge property business, with over 50 listed firms and a total market cap of over U.S. $75 billion; this augurs well for REIT growth.

Japan's Investment Trust Law, enacted in November 2000, established the REIT vehicle, and two REITs were listed in September 2001. Now there are 13 listed "J-REITs", with total assets of U.S. $16 billion. This rapid expansion has been supported by the yield gap with Japanese Government Bonds, and by the liquidity and transparency of REITs. J-REITs are understood to be special purpose companies with no employees, and limited business scope and leverage. They do not pursue development and are managed more conservatively than ordinary real estate companies in Japan. Almost all J-REITs are in a growth phase, and are actively purchasing properties, mainly from private real estate funds, Japanese insurance companies or non-REIT real estate companies. Moody's rates three J-REITs, and we expect this to increase.

Europe: More Nations Join the REIT Bandwagon

REITs are on the rise in Europe. Already established in the Netherlands and Belgium, they were introduced in France in 2003. Confidence has been growing that the United Kingdom could permit the introduction of REITs as soon as 2005. In addition, the German government has been lobbied to pass a REIT law.

Following the introduction of the Société d'Investissement Immobilier Cotee (SIIC) in France, discounts to NAV in the quoted real estate sector have narrowed. Most listed property companies such as Unibail and Sophia have now converted to SIIC status. Other European companies, such as Hammerson of the U.K., have also obtained a secondary listing for their French assets, enabling them to elect to be treated as SIICs. More recently, Société de la Tour Eiffel, a non-listed property company, has sought SIIC status as a prelude to expansion—indicating that the SIIC structure may have the effect of promoting the expansion of the listed property sector in France.

The U.K. commercial property industry submitted its response following the publication in March 2004 of the government's consultation document entitled "Promoting More Flexible Investment in Property: A Consultation." The industry's stance is that while acknowledging the need to ensure appropriate protections for retail investors, the investment vehicles should be left as unfettered as possible so as to allow the free market to operate. The property industry argues for maximum operational freedom in terms of management structure, gearing and development activity, while structural and governance criteria should be clearly prescribed.

There appears to be consensus that the vehicle should be closed-ended, but there remain several issues to be decided, including:

• whether the corporate or trust model is the appropriate legal form;
• whether or not such vehicles should be required to list;
• whether or not management should required to be internal;
• eligible income and distribution requirements;
• whether or not borrowing levels should be prescribed;
• definition of property, and inclusion—or not—of development activity.