REITs: Real estate heading for the stock exchange

REITs: Real estate heading for the stock
exchange

Real Estate Investment Trusts (REITs) are public limited companies whose
assets are real estate. Their listing on the stock exchange faciltates simple,
transparent and liquid investment in the German real estate market.
By Dr. Martin Steinbach, Head of Issuer Relations, Deutsche Börse AG

REITs have existed in the USA since the 1960s. They were later introduced in
other countries, such as the Netherlands, Australia, Canada, Japan, Belgium and
France, sometimes in modified form. And REITs are soon to be available in
Germany as well. Experts are currently discussing the legal and, in particular, tax
framework for the German REIT model. The German REIT (G-REIT) is expected
to be introduced in 2006 or early 2007. REITs are already very successful
internationally, because they unite benefits for companies and investors.

Activating real estate assets
Companies who are not in the business of purchasing, selling, or renting out real
estate can place their real estate assets on the stock exchange in the form of a
REIT, e.g. via spin-offs or selling to portfolio companies. This may be an
interesting option because it frees up potentially low-profit capital that has been
tied up in real estate, and allows it to be reinvested in core business areas and
used to increase the equity ratio. Germany offers high market potential.
Estimates show that 73 percent of real estate used by German companies is
owned by the companies themselves; in the UK, the figure is 54 percent, and in
the US just 25 percent. The public sector in Germany is also a potential REIT
issuer. REITs give existing real estate companies an attractive new route to
market access and financing via the stock exchange.

New attractive asset class
REITs are listed securities. Compared to current forms of real estate investment,
such as open-end or closed-end real estate funds, REITs offer numerous
advantages for investors. REITs give investors the opportunity to invest in
German real estate on a small scale, and in a transparent and liquid way.
   §   Diversification. Investing in real estate is generally associated with stable
       returns, high security and low volatility. Nevertheless, investors in real
       estate are subject to a relatively high cluster risk. With REITs, this risk
       can be diversified, without incurring front-end loads or high transaction
       charges. This is because investors have the opportunity to invest in
       various real estate items simultaneously, and can even focus their
       investment on particular types of real estate, e.g. commercial, hotels,
       residential, clinics or shopping centers. REITs are therefore likely to be an
       interesting option not only for international institutional investors (such as
       insurance undertakings or pension funds) who wish to engage in the
       German market, but also for private investors who can achieve
       substantial risk diversification with small sums.
   §   Risk/return profile As a rule, REITs can be classified as equity securities.
       The proposal for Germany provides for 90 percent of the annual income
       to be distributed to REIT holders, in order for the public limited company
       status and associated special tax treatment of REITs to be achieved and
       maintained. The extent to which the volatility of REIT securities is lower
       than that of shares, for instance, remains to be seen. This will vary
       according to the real estate portfolio and the portfolio activity of the REIT
       company.
       G-REITs are to have a special tax classification. On the company side,
       they will be exempted from corporation tax, whereas investors’ dividends
       will be fully subject to income tax.

Capital market requirements
The capital market places specific demands with respect to transparency,
international competitiveness and liquidity on REITs as listed securities.
   §   Transparency generates confidence and allows international comparison.
       As a security, the REIT is a special form of share with fungibility through
       its obligation to list on an EU-regulated market (Regulated or Official
       Market). The associated transparency requirements include IRFS
       accounting, ad-hoc publicity and directors’ dealings. These and other
       potential transparency requirements are designed to make REITs into an
       asset class that can be subject to international comparison. Real estate
       assets are managed internally by the management board of REIT public
       limited companies (Aktiengesellschaft – AG). Consequently, the rules on
       corporate governance and general regulations relating to public limited
       companies also apply.

§   Liquid trading, low transaction costs and daily valuation. Another
       advantage of REITs is that they can be traded every trading day. Buying
       or selling REITs incurs no load; only the usual, relatively low transaction
       costs for securities apply. The obligation to secure stock exchange listing
       with a standard free float of at least 25 percent initially, together with a
       minimum share capital specification for REIT companies guarantees
       liquid trading of the shares. Investors thus benefit from transparent
       pricing and up-to-date valuation of their real estate investment.

Deutsche Börse as a doorway to the capital market
For issuers of REITs, Deutsche Börse represents a key point of access to the
capital market. Its market segments offer conditions tailored to individual capital
needs. Deutsche Börse offers countless services to REIT companies, before,
during and after their IPO.
   §   Market credibility through international transparency standards: Deutsche
       Börse offers two transparency standards for listing REITs in an EU-
       regulated market: General Standard and Prime Standard. Companies
       opting for the General Standard must publish annual financial statements,
       including a management report, within four months of the end of each
       financial year, and their accounting practices must comply with IFRS.
       Within two months of the end of the reporting period, an interim report
       must be published, and any price-sensitive information must be made
       known in an ad-hoc release. The companies must also report any
       instance of reaching, exceeding or falling below the respective notification
       thresholds. The General Standard is the most cost-effective option for a
       REIT listing in an EU-regulated market. In the Prime Standard, REIT
       companies are also obliged to prepare quarterly reports, to maintain a
       corporate calendar, to hold an annual analysts’ conference and to publish
       corporate news in English. All these requirements guarantee a REIT’s
       transparency, increase the level of international comparability and attract
       new, globally active investor groups. These transparency requirements
       mean that investors receive comprehensive, up-to-date information,
       which lowers transmission costs between REIT companies and the capital
       market.
   §   Access to REIT investors worldwide: There are two platforms for trading
       REITs at Deutsche Börse: electronic Xetra trading and the trading floor of
       FWB® Frankfurter Wertpapierbörse (the Frankfurt Stock Exchange).
       Xetra’s main advantages are speed, reliability, transparency and low
       transaction costs. The electronic platform is now used for around 97
       percent of transactions in DAX® shares and around 94 percent of
       transactions in all German shares. Deutsche Börse calculates its indices
       on the basis of Xetra prices. Private investors likewise profit from
       electronic securities trading. Intraday trading, or real-time pricing for the
       professional wholesale market are available at all times. Xetra gives REIT

companies access to a global network of investors – over 50 percent of
    the trading volume comes from international investors, and around 25
    percent of the Xetra investor base is in the USA. So-called “Designated
    Sponsors” support trading in the securities by supplying additional
    liquidity as necessary. In floor trading, independent lead brokers are
    responsible for determining REIT prices. They quote bid and ask prices,
    and execute incoming orders in accordance with the pricing rules, or
    record them in their order books until they are executed, are cancelled or
    expire.
§   Segmentation ensures high visibility for REITs: The REIT segment classifies
    issuers and signals to investors the special tax status and level of
    transparency enjoyed by the new asset class. Peer groups make it possible for
    issuers and investors to compare companies, and make REITs more attractive
    to analysts. These peer groups are particularly important in the context of
    benchmark analyses, performance measurement and the valuation of REIT
    IPO candidates, offering various performance indicators for similar companies
    and comparing them with the company wishing to go public. Investors are
    thus able to assess the IPO candidate both quantitatively and qualitatively.
    These benefits often bring about improved analyst coverage, increase the
    quality of the analysis itself and result in a concentration of liquidity for a peer
    group on the platform. Issuers have the opportunity to position themselves
    within their peer group and, in the context of peer group analysis, to promote
    proactive investor relations. Moreover, peer groups can also be the subject of
    banks’ sector initiatives that aim to present issuers to interested investors and
    analysts.
    In addition, REIT indices structure the market and thus improve the
    companies’ profile and visibility. For the general public, they serve as
    “market barometers”; for financial services providers they form the basis
    for derivatives products, including index derivatives traded on Eurex. In
    constructing their portfolios, fund managers in particular pay close
    attention to these indices, which in turn boosts the liquidity of REITs on
    the stock exchange. “Liquidity attracts liquidity.”
§   Support for REIT public limited companies in going and being public:
    Deutsche Börse offers added value before and after the IPO. But before going
    public, REIT companies require comprehensive information on the subject of
    IPOs. A team of advisors at Deutsche Börse is available to provide sound
    guidance in all aspects of going public. The pamphlet entitled “Your IPO”,
    published by Deutsche Börse, includes details on this key strategic step; it
    helps companies to make the right decisions – from initial assessments of IPO
    readiness, to identifying suitable partners and actually preparing for the IPO,
    right up to compliance with publication requirements. Aspiring candidates can
    also use the online “IPO Test” to see whether or not their company is fit for
    the stock exchange.

Deutsche Börse Listing Partners – experts from the various fields and
       disciplines related to going and being public – offer additional professional
       support. The name “Deutsche Börse Listing Partner” stands for market
       reputation and helps issuers to select suitable experts. Listing partners are
       committed to providing support throughout a company’s entire life cycle.

Conclusion
REITs will, for the first time, enable uncomplicated, liquid and transparent
investment in German real estate assets. The fact that they can be traded every
trading day means that REITs are a cost-effective asset class, uniting the benefits
of real estate investment with those of fungible securities.
At Deutsche Börse, REIT companies can choose between lower-cost listing on the
General Standard or the additional transparency of the Prime Standard. But
whichever they choose, they will be traded on a pan-European platform and will be
consistently in the focus of domestic and international investors. These advantages
allow Deutsche Börse to fulfill the needs of both REIT companies and investors at the
same time: internationality of the capital market, visibility and exposure, investor
confidence thanks to clear transparency standards, coverage for the peer group and
low capital costs. The best conditions for REITs to become a success story in
Germany.