Navigating the Reit environment

capetownAlways be conscious of risk in your approach to the Real Estate Investment Trust (Reit) sector, according to Andrew Parsons, MD of Resolution Capital Australia.

At a recent conference hosted by the SA Reit Association Parsons said key lessons to be learnt from the Australian Reit experience is that one ignores history at your own peril.

“History may not repeat itself, but it does rhyme,” he cautioned.

“Always be conscious of risk. We grew our platform in a measured way, building on our Australian operations and experience to what is a mature and stable real estate market. At the same time we accessing opportunities in new markets through relatively modest investments in smaller platforms, which can achieve scale and diversity in a measured way without undue risk,” explained Parsons.

“The maintenance of prudent risk management practices and solid financial metrics should stand us in good stead in a more volatile market globally.”

He said Resolution Capital’s conservative approach to gearing has ensured that it entered 2016 with a balance sheet which is well positioned with minimal exposure to refinancing risk in what is now a more challenging credit market.

“This positions us well to continue to fund our existing requirements and to access future opportunities,” he added.

In his view, it is good to look at yield in the sector, but to be aware of mere yield spread investing. Other factors to look at include dividend growth, currency hedging, diversification and local partnering.

As for emerging markets, he said there are certain inherent risks involved. These include high volatility, a lack of domestic savings and capital pool, a lack of mature institutions, currency controls risk and inadequate town planning.

“Ask if this is a credible means of diversification,” he suggested.

Another factor to keep in mind in his view, is to realise that the executions risk of investing offshore is high. Also ask yourself if you are achieving effective diversification and respect fiduciary responsibility.

“Reits are relatively stable income producing long-term stores of wealth,” he said.

Keith Engel, deputy CEO of the SA Institute of Tax Practitioners, said at the conference that Reits typically distribute 95% or more of their cash flows.

In his view, challenges for the industry in the rest of Africa include little or no regulatory legislation dedicated to Reits. There are also high withholding tax charges, poor treaty networks, construction tax risks, problems with land title, heavy import and transportation charges and too many smaller markets.

Guillaume Poitrinal, ex-CEO of Unibail Radamco Europe and CEO of Woodeum, gave some insights in the European Reit industry.

Currently there are a total of 340 property companies listed in Europe with a market cap of about €188bn. Europe is, however, still underdeveloped compared to North America’s Reit sector,  which has a market cap of €637bn.

The European Reit sector is, therefore, in the early stages of development with the tax regimes being relatively new, but also with the potential for consolidation to reach economies of scale.

In Poitrinal’s view, the best way to establish a successful Reit is to avoid bureaucracy and to rethink your strategy continuously. Also continuously improve your real estate products, differentiate and re-invent your customer experience, innovate and offer digital initiatives and take note of environmental concerns.

“The future belongs to Reit’s with active management, great projects and low debt,” he said.

This article first appeared on fin24.com.