EUROPE – Real estate investment trusts (REITs) that do not focus on the quality of their underlying assets will fail to gain traction among institutional investors focused on income rather than absolute returns, according to EPRA chief executive Philip Charls. 

"In this market, you can only do it if you abide by the rules on transparency and proper regulation," he said in an interview with IP Real Estate.

"But, just as importantly, they need to be high-quality assets. The message is: don't offload poor-quality assets because it won't work in listed real estate."

He also confirmed a recent suggestion from Bernd Stahli, head of European property research at Merrill Lynch, that REITs would need to adapt to investors' appetite for income-based returns.

"There needs to be an income play – for example, in the rental agreement," Charls said.

"REITs will need to fulfil the requirements of quality assets, quality management and income. Our membership focuses on income rather than NAV growth. At the end of the day, that's what creates pension fund appetite."

Despite the reconfiguration of domestic REIT regimes in Ireland and Spain last year, Charls suggested the market would be as significant as regulation in determining the structure's contours.

"If they are not good and up to date, it won't be what the market wants," he said. "You don't need rules on leverage, for example, because the market will judge."

Although he acknowledged that "it would help if there were certain imperfections that were not there", Charls suggested a standardised pan-European structure would be largely irrelevant to short-term REIT take-up.

"It's on the radar screen but to ask for it now might confuse the legislators," he said.

"Now, it's more realistic that REIT regimes do all they can [to ensure transparency and quality]. With all the issues legislators currently face, it is not top of the agenda."

In the meantime, although he remained very positive on growth in Europe for "the whole REIT family", Charls acknowledged that REIT performance, like the rest of the real estate market, remained vulnerable to European macro exposure.

"It's fair to say investor appetite for REITs is predicated on economic fundamentals," he said. "There's less concern in Germany about the quality of the assets."

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