17,000,000,000,000 US dollars is the value of real estate world-wide. To break it down, according to 2016 calculations by real estate adviser Savills, the value of housing, office buildings, stores, hotels, warehouses and agricultural land totals $217 trillion, or approximately €193 trillion. Less than half of that is purchasable and therefore of interest to investors: Savills analysts value this portion at around $81 trillion. Two thirds of that is residential real estate, while the other third is divided between commercial properties ($19 trillion) and agricultural land ($8 trillion). A glance at the global stock market shows just how massive the investable real estate universe still is. At around $55 trillion, the stock market reaches around two thirds of the volume of its real estate competitor. Clearly an enormous investment amount – especially for investors who do not wish to become direct owners of buildings, but instead prefer an indirect holding. A variety of investment vehicles have been created over the past few decades for them. They enable small investors to participate in the capital-intensive real estate market and make it easier for major professional investors to spread their investment risks and lower the purchase and management costs.
Real estate funds
This is the classic option for indirect property investments. The first products that transferred the equity investment fund model to real estate were created around 80 years ago. Real estate professionals purchase all types of buildings with capital collected from investors and earn profits for their customers from rental revenues, sales and value appreciation of the property portfolio. They hold fund units that gain or lose value depending on successful management and the market situation. The unit price is calculated by the investment management company. The funds are not traded on the stock market with just a few exceptions, for example in Switzerland. In Europe in particular, non-listed real estate funds are the instrument of choice. INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, counted 424 funds in Europe and North America at the end of 2016 with €276 billion in real estate assets. Funds based in Germany take the top spot: they alone hold real estate assets of nearly €75 billion, which corresponds to almost 27 percent. By contrast, US-based non-listed funds don't even reach the €5 billion mark – a clear sign of the preferences of national investors.
Fund types: open- and closed-ended, and institutional
Open-ended real estate funds dominate the European investor map. Two thirds of all non-listed funds in the industry association INREV's investment universe fall within this investment category. What makes them distinctive is that the number of fund units to be distributed is unlimited, and the funds are regulated – quite strictly when it is a retail fund for small investors. Closed-ended real estate funds are also issued for private investors, but function differently from open-ended real estate funds, as both the amount of fund capital and the investment period are limited. Additionally, the investment is considered an entrepreneurial stake with a higher minimum investment sum compared to an open-ended fund, with a significantly higher risk of loss – as well as opportunities to profit. For their indirect real estate investments, insurance companies, pension funds and provident funds prefer institutional funds set up according to German law as a form of asset management for legal entities. The advantage is that the funds are geared towards their specific requirements and investors have a significant say in investment decisions. At the same time, the funds bring cost and tax benefits compared to direct real estate investments. The numbers speak for themselves. According to the German Investment Funds Association, BVI, €64.4 billion was invested in German open-ended retail funds for institutional investors in 2016. Open-ended fund assets came to €87.6 billion.
Private equity (PE) means capital investment in non-listed companies. PE funds collect capital from major investors and invest in real estate and real estate companies among other things. For example, US investment giant Blackstone used the money from one of its real estate private equity (REPE) funds in early 2017 to acquire German property group Officefirst from IVG for an estimated €3.3 billion. REPE funds have a longer history in the US and UK; they took hold in continental Europe in the early 2000s. In 2016, 290 REPE funds with total equity capital of $145 billion were issued – 15 percent more than in the previous year according to data from the Swiss investment consultant Swisslake Capital. This vehicle is particularly popular in North America: 158 funds totalling $63 billion in equity capital were issued there in 2016. Europe had 71 funds with volumes coming to $37 billion, and in Asia, 43 funds totalling almost $20 billion.
In countries with a long tradition of stock trading, the stock market is also one of the top places for indirect real estate investments. One special corporate form has caught on for listed real estate companies: they operate as real estate investment trusts (REITs). The first REIT was introduced in the US in 1960, with global success coming four decades later. The most important REIT features are that the real estate company must distribute the vast majority of its profits – in Germany 90 percent – as dividends to investors, who pay taxes on them. In return, no business taxes are levied. As of the end of May 2017, 335 companies with market capitalisation of €1.3 trillion are included in the leading REIT index, the FTSE EPRA/NAREIT. North America is the heavyweight. The 151 REITs traded there weigh in with a market capitalisation of €690 billion, followed by 80 Asian companies with€342 billion and 103 European companies with €210 billion. Only three REITs are listed in Germany – ten years after their introduction. One reason is that German residential property companies are not allowed to use the REIT as a legal structure.
AG and SE
The reason real estate companies don't always choose the legal structure of an REIT is primarily strategic. As a traditional AG (a public limited company in German-speaking countries), they do not have to completely distribute their profits in contrast to an REIT. Instead, they can plough them back in. This enables them to set aside funds for future acquisitions or expansions, an important advantage in a capital-intensive industry like real estate. Since the end of 2004, many European companies have operated as a Societas Europaea (SE). This standardises the legal basis for listed companies within the EU and offers flexibility in the design of corporate governance and employee participation.