The first ULI UK REIT seminar took place on 12th October at the offices of Goodwin where an audience of 100 heard about the state of the UK REITs market, why we are seeing a flurry of new REIT launches, the pros and cons of externally managed REITs and the lessons that we can learn from the US REIT market.

The seminar opened with presentations by Hans Vrensen, Managing Director / Head of Research & Strategy, AEW Europe, London on the state of the market and Ettore Santucci, Partner, Goodwin, Boston on lessons from the US.  The presentations can be found here:

Hans Vrensen, AEW Europe

Ettore Santucci, Goodwin

Hans and Ettore were joined by Sapna Shah, Corporate Finance, Investment Companies, Cenkos, Richard Croft, Chief Executive Officer, M7 Real Estate and John Lutzius, Managing Director, Green Street Advisors in a panel moderated by Audrey Klein, Head of Equity, Cromwell Europe.

The panel discussion opened with an interesting debate on the merits of an internally or externally managed REIT model. The broad conclusion was that this was very much a matter of horses for courses. Many of the current IPOs of smaller, specialist REITs are only achievable in an externally managed vehicle. Views differed as to whether this should ideally morph into an internally managed model as scale is achieved or if external management is a state of nirvana to be maintained in perpetuity. In this context, it was noted that the externally managed REIT has fallen entirely out of favour in the United States. The externally managed model was discredited in the US by a number of governance failings, in the words of Ettore Santucci, managers “succumbing to temptation”.

This was felt to be an important lesson for the UK. Robust governance is essential to avoid the problems suffered in the US – strong, independent boards, comprehensive and comprehensible management agreements and a transparent fee structure that aligns the interests of the manager and the investors in the REIT.

A second case of “horses for courses” was in respect of the jurisdiction of choice for the listing, London or Channel Islands? Both are used extensively, London listings being attractive for those looking to maximize liquidity in the shares with Channel Islands listing being favoured by those looking for cheaper access to the tax benefits of a REIT without needing liquidity.  Following changes in 2012 a Channel Islands REIT listing no longer requires a free float.

The final case of “horses for courses” was in respect of scale. Is size important? John Lutzius highlighted the increased liquidity that came with size provided that this was not achieved by sacrificing returns. Richard Croft echoed this in his comments. Shooting the lights out in the capital raise is all well and good, but you still need to deploy the funds raised. Sitting on a big pot of cash will be a huge drag on returns.

Sapna Shah outlined the practical challenges of achieving a successful IPO with a plea to managers not to under-estimate the time required to prepare.

Blog written by John Forbes, Founder, John Forbes Consulting and Vice Chair, ULI UK

Further photos from the 12th Sept ULI REIT Seminar can be viewed here: ULI REIT Seminar Album