UK - Assets held by the UK Reits market could double over the next few years if investors such as pension funds sold their real estate assets to the listed market, according to First State Investments.

Speaking at a seminar in London last week, Stuart Martin, senior portfolio manager for property securities at First State Investments, told delegates despite current negativity towards UK property investment, and listed securities in particular, the UK real estate investment trust (Reit) market could leap from £36bn (€51.1bn) as pension funds and similar institutional investors hold a further £73bn in direct property.

Over recent years, pension funds investing in property have sought to diversify their assets further by holding both direct and indirect property, and the shift over the last decade has been to sell direct holdings in favour of fund-based investments.

More specifically, Martin said "if you assume some comes out of pension funds balance sheets, the [UK] listed property market could double", further adding the German Reits market has substantial room for growth as just 1% of German property is on the listed market.

His focus on the global Reits market reveals the real estate listed securities market has a market cap potential of $2trn (€1.5trn) by 2010 - despite the current slowdown of property interest in Europe - in part thanks to moves by the Italian government to create a Reits regime as well as an intention to create Finnish Reits system by 2009 and push to create an EU-wide Reits umbrella. (See IPE story: )

While market sentiment in real estate has dropped in recent months as a result of the credit crunch, property prices are generally still seen as "good" in the core real estate market, albeit yields are expected to shift slightly in the secondary market, according to Martin.

"There is good like-for-like rental growth across the portfolio, giving some reasons to smile. In Europe, the outlook remains pretty positive, even when looking at the London office, which is a good indicator. The vacancy rates are at an all-time low at just 3.8% compared with 7% a year ago. Rental growth in the City was 10-12% over the last 12 months, demand continues to push forward and demand is high, sliding through to those at the five-year rent review," said Martin.

This is also despite talk of potential consolidation of properties among major firms in the London City market - Deutsche Bank being one candidate, for example as it currently occupies 22 buildings but is said to be looking to consolidate - as Martin believes a large Australian bank is "still expected" to take 150,000sq ft of space in the near future.

"The near-term potential for job losses is there, but with the lease terms the ability to walk away from obligations is difficult. What we have seen is the large investment banks have used space as much as possible, and we hear stories of people working in corridors because they are trying to maximise the space they have got," he added.

Whereas the London property market might in the past have been driven by activity in the investment markets, First State says 60-70% of the leasing activity has in recent months came from the media, accountancy and law firms, 60-70% of the leasing in the London market.

Similarly, First State believes there are still gains to be had in Paris - where the vacancy rate is 55% in general and 4% in Paris CBD is 4% thanks to strong expected economic growth.

More surprisingly, First State sees Moscow as the bigger ‘infrastructure' story as Martin said most of its buildings - approximately 80% in total - are ‘C Grade' and therefore not suitable for habitation, so being bulldozed and replaced by A Grade quality space.

"At least 40% of the Moscow market is taken up by international tenants, but the rest is government buildings looking to move up from C Grade to quality space. Rents are 15% up per annum, and industrial and retail [markets] are gaining too, continued Martin.

Given the current real estate momentum in countries such as Germany and Asia too, as well the "mispricing" of UK Reits, Martin believes the listed market has significant growth for pension fund returns over the coming months.

"I see the market returning to single digit growth, perhaps falling in some areas, but with continued capital growth. We believe the fall in European securities pricing is an opportunity as it is mispriced. We are underweight in UK, as we don't believe with the current negative sentiment it is the right time to move. Twelve months ago, the fundamentals looked strong, but there is mispricing so there are opportunities to be had. So we are overweight in France, and in Finland, where they are resources-based and have a constant market, and we are now moving to overweight in Germany particularly in the office market," he added.

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