A REIT recovery will not in itself overcome reluctance to invest in listed real estate, says Shayla Walmsley.

Ernst & Young is predicting a global REIT recovery. In a six-market study published this week, practice leaders Robert Lehman and Howard Roth pointed out that only the UK market lags the nascent recovery, coming in at 60% of its 2007 peak. Yet even in the UK, according to a report by Deloitte also published this week, REITs will be among the biggest buyers next year, seeking scale in larger lot sizes.

Yet there are two assumptions about REITs that require unpicking. The first is that a REIT is a REIT is a REIT. French REITs' performance – 13.1% in Q1 against an overall European 11.5% – is to some extent attributable to a revival in investor confidence as a result of REITs' deleveraging and visible risk aversion. But, as the report points out, there is a big difference between a prime-investing, leverage-avoiding listed giant and a nimble US specialist REIT chasing above-core returns.

Moreover, major variations in performance have been driven by factors other than the REIT structure. After a relatively uniform recovery in 2009-10, returns last year varied from 8.1% (Australia) to 20.4% (Japan).

The second assumption is that REITs are a proxy for listed. Yet at least when it comes to building up Germany's negligible listed market, REITs are something of a digression. In a recent note, EPRA contrasted a German market dominated by open-ended funds with France's thriving REIT market. But in a clarification this week, EPRA director Gareth Lewis suggested that to focus on REITs per se was to miss the point.

"REITs are responsible for the success of the listed market in some countries, but others have perfectly healthy listed markets without REITs regimes," he said. "The big challenge for Germany is to kick-start the listed sector. The focus on REITs – and this doesn't just apply in Germany – is confusing the issue. We've been trying to refocus the discussion away from REITs and towards listed."

Within a few years, there will be fewer REITs to invest in, with not only other REITs but non-listed buyers hunting distress among REITs trading at a discount to NAV.

The number of J-REITs shrank from 40 to 33 by April. Elsewhere, expected REIT consolidation has not happened – at least not on the scale anticipated – because of the uncertain economic environment, leverage aversion and concerns over pricing. But an increasingly likely looking merger between London & Stamford and Metric would create a significant-sized UK REIT and suggests a future consolidation pattern, with small REITs seeking scale via tie-ups with larger firms.

Market size aside, there are reasons for investors to be cautious.

REITs are not immune to regulatory attention. They are not specifically identified in a draft agreement between the US and five European countries over the provisions of FATCA, which may suggest they are low enough risk to be compliant or, conversely, that they will not be included in exempt categories such as pension funds.

Ros Rowe, tax partner at PwC, says she is currently seeking clarification from the UK government. "We don't have the total clarity we'd like," she said. Even if the likelihood is that they will be exempt, as unlikely vehicles for tax avoidance, REITS involved in joint ventures will be required to scrutinise not only their counterparties but their counterparties' counterparties. In short, the regulatory burden will not get any lighter.

In any case, pension funds and other liability-driven investors seeking macro-immune and counter-cyclical assets are unlikely to seek those qualities in REITs, even if in the longer term they look less like equities are more like real estate. Best case, REITs will dominate the listed part of a blended portfolio of listed and non-listed, as a recent Expo panel suggested, even if some institutional investors – German insurer Allianz among them – still shun listed altogether.