Property’s toolbox is filling up

LONDON - Real estate investment is becoming more acceptable as a financial asset, as rapid securitisation of the industry tackles its traditional lack of liquidity.

Deep structural change is occurring globally on the debt and equity sides of the industry as the real estate market booms, channelling huge capital flows into these fast expanding markets and generating lucrative fees for banks.

Investors can now access one of the world's biggest capital markets cheaply and easily through listed and private funds, debt and income-backed securities, non-performing loans and, most recently, a derivatives market.

In the past, the sale and purchase of buildings would frequently take six months and sometimes incur costs equivalent to 7 per cent of the value of the deal.

But by securitising property, investors can combine the liquidity and efficiency of electronic dealing with real estate's traditional attributes of steady long-term rental income flows, the security of a physical asset and a risk/reward profile midway between equities and bonds.

"Real estate is riding a wave," said John Gellatly, investment banking director in property advisory at CSFB.

"For the first time, the toolbox for playing property is as full and interesting as it has ever been.

"In pole position in Europe has to be CMBS (commercial mortgage-backed securities). It's active and up and running and the momentum of volume is growing fast.

"Behind that is probably derivatives, in the sense that the first derivatives trades are being done and, ultimately, it will drive the cash markets like equities."

In the equities market, tax-efficient real estate investment trusts (REITs) are expanding rapidly around the world after a dramatic rise in their value on the stock market in the United States since the early 1990s.

A major obstacle to growth in the real estate investment market has been a lack of supply to meet strong demand.

This, too, is changing as governments and corporates offload illiquid property holdings from their balance sheets to raise capital.

- REUTERS