Property Investment Vehicles - Kungliga Tekniska högskolan

Division of Building and Real Estate Economics 

Department of Infrastructure 

Royal Institute of Technology 

Stockholm, 2002 

Number: 172 

Property Investment Vehicles: 

An International Comparison 

Author: Lovisa Lindberg Supervisor: Hans Lind

Property Investment Vehicles Lovisa Lindberg 

Master of Science Thesis 

Title: Property Investment Vehicles: An International Comparison 

Author: Lovisa Lindberg 

Department: Department of Infrastructure 

Report ref.: 172 

Supervisor: Hans Lind 

Royal Institute of Technology, Stockholm 

Key words: Property, equity securitisation, indirect investment, investment vehicle 

Abstract 

The purpose of this study is to describe and compare vehicles for indirect property 

investments in Belgium, Germany, the Netherlands, Norway, the United Kingdom and 

the United States of America from an investor point of view. The vehicles are analysed 

with regard to tax efficiency, transparency, liquidity of the investment, costs of 

transaction and return on investment. The vehicles included are property investment 

funds, property investment companies, other forms of co-ownership and participation 

rights. 

Tax efficient property investment companies exist in the UK, U.S.A., Belgium, 

Germany and in the Netherlands. In reciprocation for favourable rules of taxation, these 

companies may be restricted by rules limiting their business activity, regulating their 

ownership structure, limiting their business risk and compulsory paying out of profits. 

In Belgium and Germany, participating loans are used by investors seeking financial 

exposure to the real estate market. These are bearer or registered and may be listed on 

stock exchanges. However, they are not as widely used as other property investment 

vehicles in their respective countries and the liquidity is therefore low. 

The reasons for the popularity of private property vehicles among investors vary. 

Norway lacks property investment companies, which in combination with a tradition of 

investing in real estate syndications explain the use of limited partnerships. In the UK, 

limited partnerships offer institutional investors the possibility to influence the 

investment strategy. The German closed-end funds are mostly tax driven, but are also 

the only alternative available to private investors seeking focused property exposure. 

The property investment companies offer greater liquidity, transparency and lower costs 

of transaction than do shares in private property vehicles. Of the property investment 

companies, the American REITs and the Dutch FBIs best meet the demands for 

liquidity of the investment, tax tefficiency and low costs of transaction. Their return of 

investment is however less correlated with that of the real estate market than is that of 

the German open-end funds. The open-end funds are however not tax transparent and 

are associated with higher costs of transaction. 

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Examensarbete 

Titel: Former för indirekta fastighetsinvesteringar: en internationell 

jämförelsestudie 

Författare: Lovisa Lindberg 

Institution: Institutionen för infrastruktur 

Kungliga tekniska högskolan, Stockholm 

Examensarbete nr.: 172 

Handledare: Hans Lind 

Nyckelord: indirekta investeringar, fastigheter, bolagisering, investeringsformer 

Sammanfattning 

Generellt sett söker investerare en investeringsform som är skatteeffektiv, lättanalyserad 

och förbunden med god likviditet och låga transaktionskostnader. Dessutom ska 

investeringen ge en avkastning som är korrelerad med fastighetsmarknaden. Syftet med 

denna rapport är att beskriva och jämföra former för indirekta fastighetsinvesteringar i 

Belgien, Tyskland, Nederländerna, Norge, Storbritannien och USA ur en svensk 

investerares perspektiv. De undersökta investeringsformerna är fastighetsfonder, 

fastighetsinvesteringsbolag, andra former av samägande och vinstandelslån. 

I Storbritannien, USA, Belgien, Tyskland och Nederländerna finns skatteeffektiva 

fastighetsinvesteringsbolag. I utbyte mot skattelättnader begränsas dessa företag vad 

gäller deras affärsverksamhet, ägarstruktur och affärsrisk. Vidare ska en bestämd andel 

av resultatet delas ut till delägarna årligen. 

I Belgien och Tyskland förekommer att fastighetsbolag ger ut vinstandelslån. 

Vinstandelslånen kan noteras på börsen eller vara oregistrerade. Dock är denna 

investeringsform inte så vanlig som andra fastighetsinvesteringsformer i dessa länder. 

Privata fastighetsinvesteringsbolag används av olika skäl. I Norge finns inte 

skattetransparenta fastighetsinvesteringsbolag, vilket i kombination med en tradition att 

syndikera investeringar har gjort kommanditbolag vanliga för fastighetsinvesteringar. I 

Storbritannien använder institutionella investerare kommanditbolag eftersom de 

därigenom kan påverka investeringsstrategin. De tyska begränsade fonderna är till stor 

del skattedrivna, men är också den enda tyska investeringsformen som tillhandahåller 

fokuserad fastighetsexponering. 

Investeringar i fastighetsinvesteringsbolag är lätta att analysera, innebär bättre likviditet 

och lägre transaktionskostnader än investeringar i onoterade 

fastighetsinvesteringsbolag. De fastighetsinvesteringsbolag som erbjuder bäst likviditet 

i kombination med skatteeffektivitet och låga transaktionskostnader är amerikanska 

REITs och holländska FBIs. Avkastningen är dock mindre korrelerad med marknaden 

för direktägda fastigheter än den för de tyska obegränsade fonderna. Dock är de 

obegränsade fonderna inte skatteeffektiva och transaktioner är förbundna med högre 

kostnader. 

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Table of Contents 

Property Investment Vehicles: 

An International Comparative Study 

1. INTRODUCTION 1 

1.1. BACKGROUND 1 

1.2. PURPOSE 2 

1.3. METHOD 2 

1.4. DISPOSITION 3 

2. THEORY 4 

2.1. THE CHARACTERISTICS OF PROPERTY INVESTMENTS 4 

2.2. DIRECT OWNERSHIP OF PROPERTY 5 

2.3. INDIRECT OWNERSHIP OF PROPERTY 6 

2.4. SECURITISATION 7 

2.4.1. PROPERTY SECURITISATION 8 

2.4.2. METHODS OF SECURITISATION 8 

2.5. A SWEDISH PERSPECTIVE 9 

2.6. PROPERTY INDICES 10 

2.6.1. PROPERTY INDICES AVAILABLE IN THE INVESTIGATED COUNTRIES 11 

3. NATIONAL PROPERTY INVESTMENT VEHICLES 14 

3.1. USA 14 

3.1.1. INTRODUCTION 14 

3.1.2. SECURITISATION OF REAL ESTATE 15 

3.1.3. REAL ESTATE INVESTMENT TRUSTS 15 

3.1.4. CONCLUDING COMMENT 20 

3.2. BELGIUM 21 



3.2.3. BELGIAN REAL ESTATE CERTIFICATES 21 

3.2.4. SICAFIS 22 


3.3. THE NETHERLANDS 26 



3.3.3. FISCALE BELEGGINGSINSTELLING 26 


3.4. GERMANY 31 



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3.4.3. PARTICIPATION RIGHTS 32 

3.4.4. CLOSED–END REAL ESTATE FUNDS 33 

3.4.5. OPEN–END REAL ESTATE FUNDS 34 


3.5. THE UNITED KINGDOM 39 



3.5.3. LIMITED PARTNERSHIPS 40 

3.5.4. AUTHORISED PROPERTY UNIT TRUSTS 42 

3.5.5. UNAUTHORISED PROPERTY UNIT TRUSTS 43 

3.5.6. MANAGED PROPERTY FUNDS 44 


3.6. NORWAY 46 



3.6.3. PROPERTY SYNDICATIONS 47 


4. ANALYSIS OF INVESTMENT VEHICLES 49 

4.1. CATEGORISATION OF THE INVESTMENT VEHICLES 49 

4.2. LEGAL FRAMEWORK 49 

4.3. CATEGORIES OF INVESTORS AND MARKET CAPITALISATION 51 

4.4. INVESTMENT STRATEGY 53 

4.5. PERFORMANCE 54 

4.6. KEY SUCCESS FACTORS 55 

5. CONCLUSION 57 

APPENDIX I 63 

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1. Introduction 

1.1. Background 

Real estate makes up a large portion of the total assets of a country. The value of 

Swedish real estate is estimated to total some 5000 billion SEK, of which 2000 

billion SEK is available to investors (Fastighetsägarna, 2002). As a comparison, the 

market capitalisation of the Stockholm Stock Exchange was 1 890 billion SEK on 

August 30, 2002 (Stockholmsbörsen, 2002:1). The market capitalisation of the listed 

property companies at the same date was 82.5 billion SEK, or 4% of the market 

value of the Stockholm Stock Exchange (Stockholmsbörsen, 2002:2). 

The European property market is becoming increasingly international. The 

development of the European Monetary Union and of national legislation has led to 

an increase in the cross border affairs. Dagens Nyheter (14 August 2002) reports 

that 50% of the commercial property sold in Sweden in the first six months of 2002 

were sold to foreign investors. 

Traditionally, owner users and large investment institutions, such as insurance 

companies and pension funds, have dominated real estate investment in many 

European countries. Today we see a growing interest in indirect investment vehicles 

for property investments, such as property funds or investment companies. With this 

background, it is interesting to investigate the investment alternatives on the 

property market. 

Historically, property has been considered a real value secured investment. Property 

is generally weakly correlated with the equity market and bonds. Therefore, 

professional investors often use property to diversity a portfolio of equities and 

bonds. 

Property differs from financial assets like equities and bonds in many ways. It is an 

immovable asset, whose value is much dependant on the location. There are high 

costs associated with the purchase and sale of a property, which makes property a 

long-term investment. These facts combined with the fact that the cost per entity is 

rather high, makes the property market illiquid. Furthermore, property requires an 

active management and the supply is lagging and heavily regulated by the 

government. These factors make trading of property more complicated than dealing 

with shares or bonds. It also makes the return and risk on property investments 

different from that of bonds or shares. 

The most common form of ownership in all investigated countries is direct 

ownership. This stems from the fact that property is not only a financial asset, but 

also holds a utility value. Residential properties are therefore often owned directly 

by the residents of the building. Commercial property, on the other hand, is often 

held by institutional investors, i.e. insurance companies and pension funds, or 

property investment companies. Institutional investors invest in property in order to 

diversify their portfolio and spread the risks of investment. 

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Direct ownership of property has some drawbacks compared to other assets. Firstly, 

owning property is very management intensive. Secondly the low liquidity of 

property leads to an inability to implement tactical asset allocation decisions. 

Finally, a property portfolio contains a high degree of property specific risk, linked 

to the individual assets within the portfolio, and the relatively small number of 

properties that comprise the portfolio itself. The benefits of direct ownership of 

property include improved control of the management and use of the property. 

Furthermore, the investor may tailor the exposure to his preferred properties. 

Property may also be owned indirectly. One way of doing so is to hold shares in a 

listed property company. This way, the investment is more liquid and the minimum 

investment lower than by direct investment. Furthermore, it is a passive investment 

as the investor may choose not to take part in the management of the company. 

Finally, the property specific risk is reduced and the transaction costs lowered as an 

effect of pooling properties. However, investing in property shares is not as tax 

efficient as direct ownership of property would be because of the double taxation of 

dividends. For this reason, property investors seek alternatives to direct property 

investments and investments in listed property companies. 

1.2. Purpose 

The purpose of this report is to describe and compare vehicles for indirect property 

investments in Belgium, Germany, the Netherlands, Norway, the United Kingdom 

and the United States of America. The vehicles are analysed with regard to tax 

efficiency, transparency, liquidity of the investment, costs of transaction and return 

on investment. The aim is to give investors an overview of the investment markets 

and the legislation concerning the investment vehicles. 

The vehicles included are property investment funds, property investment 

companies, other forms of co-ownership and participation rights. Focus is on the 

most tradable securities on the respective national markets and their relative 

importance in the national economy. Real estate derivatives and mortgage-backed 

securities are not covered in this report, nor are property shares. 

1.3. Method 

The analysis has been conducted by assimilation of information from a variety of 

sources. Factual data have been gathered from literature, papers, articles, reports, 

official publications and Internet sites as indicated in the list of references. Those 

company reports that are available on the Internet are specified in the list of 

references, otherwise they may be obtained directly from the company. Specific 

questions on issues where little written information is available have been asked 

people who work on the market in question by e-mail. The theoretical basis of this 

report is in the field of finance, which stipulates that the value of real estate and the 

distribution of owners is dependant on the anticipated yield, risk and liquidity of the 

asset. 

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In order to limit the scope of this report, the number of countries investigate were 

set to six. The countries investigated were chosen because the development of 

indirect property investment vehicles have reached different stages and taken 

different forms in these countries. The availability of information was also a 

criterion of selection and an impediment in the search for information. 

Data on the gross domestic product of each investigated country stems from the 

OECD. Information about the mentioned stock exchanges and on equities that are 

listed on them stem from the stock exchange in question unless otherwise stated. 

The source of information may be either the web pages of the stock exchange, or a 

report or press release from the company owning the stock exchange. Likewise, 

information on property indices originates from their respective organisation. All 

sources of information are included in the list of references, but to avoid repetition, 

references to the stock exchanges or to OECD are not included in the text. 

Throughout the report, the term property investment company is to be distinguished 

from the concept of property companies. The term property investment company 

refers to companies that benefit from favourable rules of taxation under certain 

given conditions. Property companies on the other hand, are companies whose main 

line of business is real estate, but who are taxed as other companies with the same 

legal structure. 

1.4. Disposition 

The following chapter contains a description of investment vehicles on the abovementioned 

markets. For each investment vehicle, the legal framework, investor 

categories, property sectors of investment and relative performance are described. 

This chapter is followed by a comparative analysis of the vehicles, the legal 

framework, the investment strategy and the performance of the investment vehicles. 

Then, key success factors from an investor’s point of view are discussed and a 

Swedish perspective is taken on property investment companies. Finally, the 

conclusion contains a summary of current trends on the European real estate market 

as well as issues raised by this report that need further investigation. A list of terms 

may be found in appendix I. 

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2. Theory 

Property is one of the main investment assets, along with shares and bonds. Shares 

(also known as stocks or equities) and property (also known as real estate) are both 

real assets, as they entail ownership rights. Bonds on the other hand, are debt 

instruments and therefore financial assets. In the United Kingdom, bonds are known 

as gilts. 

Property comprises both commercial and residential buildings. These are referred to 

as property sectors. In this report, the term commercial property is taken to mean 

offices, retail properties, industrial buildings and hotels and it is distinguished from 

residential property. The types of property that constitute the investment market and 

their financial characteristics vary from country to country. 

2.1. The Characteristics of Property Investments 

Property is generally seen as a real value secure investment. The yield of property 

investments has historically been relatively stable, associated with a low risk and 

low correlation with equities and bonds (Hoesli & MacGregor, 2000). Therefore, 

investors often invest in property in order to diversify a portfolio of equities and 

bonds. This is because the return and risk characteristics of property differ from 

those of financial assets and equities. Hoesli and MacGregor (2000) mention a 

number of features of property that have an effect on prices and the investor market. 

The ten most important are; the heterogeneity and fixed location of property; the 

high unit value; the importance of borrowing; the process of price determination; 

the development cycle and supply; difficulties classifying property; the management 

intensive nature of property; the long-term nature of the holding; the illiquidity of 

the investment; and government intervention. 

Property is a heterogeneous asset, as the properties of real estate vary by location, 

use, size of plot, size of building, age, construction, maintenance and tenant. The 

immobility of property makes the location very important. Factors external to the 

property, such as access to communications and quality of the area, affect both the 

value and potential use of a property. The relative importance of external factors 

varies by property sector. 

The high unit value of property makes it impossible for small investors to enter the 

market and difficult even for significant investors to construct diversified property 

portfolios. Swedish institutional investors, such as insurance companies, are by law 

prohibited from gearing their property investments, which further enhances the 

problems of the high unit value of property. As a consequence of the high unit value 

of property, borrowing is important for non-institutional investors. The importance 

of borrowing makes the property market highly dependent of the development of the 

interest rate. 

There is no single trading market for property or any central price listing, and the 

volume of transactions is relatively low. The heterogeneity of property means that 

the value of transaction data is limited and that it is difficult to track property 

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market movements. This leads to difficulties in forecasting property demand. 

Combined with the impossibility to increase supply quickly, it makes property 

development risky. It also results in fluctuations in the supply of new developments 

with consequences for property prices and property returns. 

The owner of property has significant management obligations. These can be 

subcontracted, but in any case include costs not associated with other investments. 

In addition to being a cost, the management of a property may add value to the 

property if done well. 

Property is generally seen as a real value secure long-term investment. High 

transaction costs and low liquidity contribute to this view of property investments. 

The low liquidity of the property market is the result of several factors, many of 

which are to be found in the characteristics of property investments as mentioned 

above. Other factors that further restrict the liquidity of property include the need 

for physical surveys, the absence of a single trading market to match buyers and 

sellers and the national systems of property taxation. 

National governments and regional authorities often intervene in the property 

market. There are several reasons for the intervention; the immobility of property, 

its relationship with neighbourhood and environmental quality, and its importance 

for the local economy and households. On the Swedish market, this has resulted in a 

relatively high level of public ownership of property, building regulations, rent 

controls in housing, subsidies and property taxes. 

These characteristics of real estate make property investments different from other 

investments. The risk and yield of direct property investments thus differ from that 

of equities and bonds. 

2.2. Direct Ownership of Property 

The purchase of an actual property is known as a direct property investment. It is 

distinct from indirect property investments, which are paper assets backed by 

property. Direct ownership of properties is the most common form of ownership. 

This stems from the fact that property is not only an investment, but also holds a 

utility value. Residential properties are therefore often owned directly by the 

residents of the house. Institutional investors or property companies, on the other 

hand, often hold commercial property as well as residential property. 

The benefits of owning property directly include control of the use of the property. 

It also enables the investor to tailor the property exposure to his preferred sectors 

and regions. Furthermore, Swedish institutional investors with direct exposure to the 

property market benefit from favorable rules of taxation. They are taxed with a 

fixed percentage of their asset value but may not gear their property investments. 

There is no dividend tax or tax on earnings payable. Property companies on the 

other hand, pay tax on earnings and the shareholders are subject to dividend tax. 

This creates a problem for property companies to raise capital from institutional 

investors, as their direct property investments are more favorably taxed. 

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Among the drawbacks of owning property directly is the problem of the high unit 

cost. This makes it difficult for small investors to diversify their property portfolio 

and thereby reduce the property specific risk. The high unit cost makes it difficult 

for small investors to invest in property, and makes the property market illiquid, 

especially the market for large objects. Another drawback of direct ownership of 

property is the required knowledge of the local market. A property portfolio 

consisting of less than 15 to 20 objects contain a significant degree of property 

specific risk linked to the individual assets within the portfolio (Malmfors & 

Nilsson, 2002). The high costs associated with the selling, purchasing and 

management of property combined with the problem of low liquidity makes tactical 

asset allocation decisions difficult to implement. 

2.3. Indirect Ownership of Property 

The basic idea of indirect investment vehicles is to pool property assets. By 

purchasing shares of a pool of property assets, the investor holds property assets 

indirectly. The most common form of indirect property investment in Sweden is 

owning property shares. There are currently 21 quoted property companies on the 

Stockholm Stock Exchange (Dagens fastighetsaktie, 169/2002). The Swedish 

property companies have no particular legal form or any specific tax advantage, but 

are ordinary public companies. Based on their line of business, they may be divided 

into two categories; property companies that acquire or develop properties and then 

retain them, and companies that construct or acquire properties and then sell them. 

The European Public Real Estate Association (EPRA), estimates that the European 

market of property companies consists of 1 000 companies, including 300 public 

companies. The European property companies currently do business in 14 European 

countries. The market capitalisation of the public real estate sector totaled about € 

80 billion, or 1.1% of the total stock market capitalisation of € 7 trillion in 2001. 

Investments in property company shares have other properties than direct 

investments in real estate. Listed property companies manage property efficiently 

and may build up specialist knowledge. Furthermore, large property companies or 

those that are focused on one market segment or region will earn a strong market 

position. By direct ownership, the investor is often faced with the opposition of 

specialisation and diversification, which may be eliminated by owning shares in 

several specialised property companies. Finally, property shares are generally more 

liquid than properties. The drawbacks of owning shares in a listed property 

company are the double taxation of companies, costs of administration and a lower 

degree of control. Furthermore, the property company shares are more correlated 

with the stock market than are direct property investments. The low correlation with 

the stock market is an important reason for investing in property, as property then 

may be used as a diversifying asset in a portfolio of equities and bonds. 

Property shares are often traded with a discount to the net asset value (NAV). NAV 

is the total value of the assets of a company, as determined by valuation of the 

properties, minus the value of its liabilities. The discount to NAV leads to 

6


difficulties raising capital by emitting new shares, and instead, property companies 

must rely on borrowing. The average discount varies over time as well as between 

the individual companies. Possible reasons for the discount to NAV include asset 

management fees, taxation effects, agency costs and lack of confidence for the 

management of the company (Hoesli & MacGregor, 2000). Weighing the pros and 

cons of owning property shares against owning property directly, Leimdörfer 

concludes that a market capitalisation of 15 percent less than the equity capital per 

share is motivated for Swedish property companies (2000). The lion’s share of the 

discount is motivated by the double taxation of Swedish property companies. In 

order to reduce the discount, the property companies may increase gearing, which 

reduces the corporate tax, or choose a line of business that an individual investor 

cannot pursue. Because of the discount to NAV, the double taxation and the higher 

correlation with the equities market, property investors seek alternative indirect 

property investment vehicles. 

From the view of an investor, an investment in an indirect property investment vehicle 

must have certain characteristics in order to be attractive. Investors generally seek a 

vehicle that is tax efficient and transparent and whose shares are liquid and may be 

traded without high costs of transaction (Malmfors & Nilsson, 2002). Generally, the 

tax efficiency of a property investment structure is measured by comparing the 

amount of overall additional tax costs incurred by investors to the tax they would have 

incurred had they invested directly in property. In addition to this, the shares or units 

are to render a return that is correlated with the real estate market. 

2.4. Securitisation 

Indirect investment vehicles may be created by means of securitisation. Securitisation 

in a broad sense includes all forms of financing using the securities markets, as 

opposed to the traditional way of financing debts by taking bank loans. In a narrower 

sense, the term securitisation refers to means of financing where assets are separated 

from a company’s other assets and financed by issuing securities 1 (Blåvarg & Lilja, 

1998). 

In this second meaning, securitisation often implies arrangements where a group of 

assets are sold to a special purpose vehicle 2 . The purchase is financed by the issuance 

of securities, which give the buyers rights to the cash flows of the assets. Almost any 

asset generating a predictable, or stable, contractually based cash flow stream can be 

securitised. Asset and contractual homogeneity is often a pre-requisite to 

securitisation, as well as reliable historical information and statistics concerning the 

cash flows in question. With that data, it is possible to assess the risk of the 

investment. This is often done by a rating institute. 

1 

A note to the Swedish speaking readers; Riksbanken använder termen värdepappersfinansiering när 

den bredare definitionen av värdepapperisering avses, det vill säga skuldfinansiering genom utgivning 

av värdepapper. Begreppet värdepapperisering används för den snävare betydelsen – värdepapperisering 

av särskilda tillgångar. 

2 

The terms Special Purpose Enterprise (SPE) or Special Purpose Company (SPC) are used as 

substitutes. 

7


Securitisation techniques originated in the late 1960's mortgage market in the United 

States. Some 20 years later, the types of underlying assets broadened to include for 

example auto loans and credit cards. Securities based on other underlying assets are 

generally called asset-backed-securities. The value of the outstanding asset-backed 

securities now total €1.5 trillion 3 . However, the most common form of securitisation 

remains the US mortgage-backed securities with a total outstanding issuance of €3.1 

trillion (Deutsche Bank, 2002). Of the asset types underlying European corporate 

securitisation, 12% are commercial property and 15% real estate businesses. 

2.4.1. Property Securitisation 

The Anglo-Saxon concept of trust makes securitisation possible without further 

changes in the legal system, whereas property securitisation in continental European 

countries implies special laws. So far, property securitisation has been realised in for 

example North America, New Zealand, Australia and some European countries. 

Property securitisation involves the conversion of property assets into tradable 

securities. The investor does not directly acquire the asset but rather invests in 

equities in a special purpose vehicle that holds the asset. Special purpose vehicles are 

defined as entities created for a limited purpose, with a limited life and limited 

activities. They may take the legal form of a partnership, corporation, trust, or joint 

venture. In return, the investor receives a proportional share of the property’s income 

flow and capital value. The purpose of securitisation is to improve the liquidity of the 

investment and reduce the associated risk. The investor can trade shares through the 

stock exchange or an over-the-counter (OTC) market. The cash flow generated by the 

assets must be reliable and large enough to cover the cost of securitisation and 

provide the investor with a return. Equity securitisation in a property context is most 

attractive to those actively involved in the property market. 

The benefits of property equity securitisation include improved liquidity through 

smaller entities, more trade parties and more efficient transactions. Public trade also 

leads to reduced risks of investment through improved information on return and 

risk. This leads to a more effective market, which will attract more investors. 

Property securitisation also has its drawbacks. The arrangements associated with the 

property investment fund or company leads to increased management costs. The 

property portfolio must therefore be large enough to cover these expenses and to 

give the investors a sufficient return on investment. The special purpose vehicle 

must also consider risks associated with the financing, the development of the 

interest rate and the currency and also with the company image. National legislation 

concerning the special purpose vehicles often aims to limit these risks. 

2.4.2. Methods of Securitisation 

The internationally most widely used types of property securitisation are securities 

based on mortgages, property investment companies, property investment funds and 

3 

The currency rate throughout this report used is the daily average from 28 December 2001. 1 USD = 

1,12493 EUR (www.svt.se/nyheter/2001/011231/230.html). 

8


other forms of joint ownership (RP 77/1997). There is little research available in this 

field. 

The property investment companies are usually limited liability companies and may 

be listed. Property investment companies differ from property companies in that 

property investment companies benefit from favorable rules of taxation provided they 

comply with certain rules and are acknowledged by the national government. The 

rules usually aim at limiting the business risk by limiting gearing, the minimum 

number of properties or their relative weight in the portfolio and by excluding 

property development from the approved line of business. Occasionally, the property 

sectors or markets in which the investment companies may invest are limited. The 

investors are protected by legislation on regular valuation of properties, a minimum 

of assets in liquid investments, the organization and registration of the companies and 

informational obligations. In the investigated countries, such legislation exists in the 

USA, the Netherlands and Belgium. 

Property investment funds have been successful investment vehicles in Germany, 

the Netherlands and in the UK. Funds are distinguished from investment companies 

in that funds are not a corporate entity and thus do not have a legal personality. 

Limited partnerships are sometimes referred to as funds, for example in Germany. 

Although these are called funds, they are in this report categorized as private 

property vehicles. 

Funds may be categorized as either closed-end or open-end. The closed-end funds 

have a fixed capital and a limited number of investors. The life of the fund is 

restricted, usually to a lifespan of 10 to 15 years. Thereafter, the assets of the fund 

are sold. Trading with shares in a close-end fund may be restricted or rather difficult 

due to low liquidity. The open-end funds do not have a fixed capital and the life of 

the fund is unlimited. The number of shares outstanding depends on demand. Thus, 

the capital of the fund corresponds to the value of the outstanding shares. A 

shareholder may sell shares back to the fund, which forces open-end funds to hold 

part of their assets in liquid assets in order to be able to trade in shares. 

Besides property investment companies and funds, there are other forms of coownership 

of property. These are referred to as private property vehicles. The 

investor is entitled to a share of the capital growth and income from the property in 

proportion to the size of the unit. This is a common form of property investment in 

the UK, Germany and in Norway. In all countries, limited partnerships are usually 

used for this purpose, but other legal forms are also possible. Furthermore, in both 

Belgium and Germany, participation loans are issued by real estate companies. The 

certificates have bond-like characteristics, as they entitle the holder to the income 

generated by the properties held by the issuer of the certificates. The construction is 

solely contractual, and the conditions and durations vary. 

2.5. A Swedish Perspective 

Sweden has not introduced legislation concerning property investment companies. 

Instead, investors seeking financial exposure to the real estate market may invest in 

9


property company shares or limited partnerships. However, Sweden lacks a tradition 

of private investors investing indirectly in commercial real estate. Institutional 

investors may not gear their property investments, and therefore usually invest 

directly in real estate. For these reasons, the scope of private property vehicles is 

limited. 

On the Swedish market, NewSec Incentive Asset Management (NIAM) is the only 

company managing real estate funds. NIAM set up funds in 2000 and 2001, with a 

total asset value of about €150 million 4 . The funds are structured as limited 

partnerships and the investors are individuals as well as institutions from the 

Scandinavian countries. Two more companies are in the process of creating real estate 

funds: Aberdeen Property Investors and Catella (Malmfors & Nilsson, 2002). Both 

have created property funds in other European countries. 

In 1998, a bill on property investment companies was brought by a group led by Carl- 

Johan Åberg. The bill was called “Property investment companies – a reform bill” 5 

(Aberg et al., 1998). He proposed a tax efficient property investment vehicle similar 

to the REITs, FBIs and SICAFIs. The line of business of the company would be 

restricted to real estate investments and there would be restrictions on the ownership 

structure as well as on the maximum level of gearing. The bill has been the basis for 

four motions to the Swedish parliament. All have been outvoted. 

At the same time, in 1998, a group led by Harald Kjessler proposed a corporate 

structure for real estate investments that was based on current legislation. He 

proposed that the property investment company would be a limited liability company 

owned by a private endowment. The investment company would be highly geared. In 

return for investments, the company would issue convertible participating loans to the 

investor. The convertible participating loans would be listed on a stock exchange. The 

investment company would be closed-end with a limited life span. This construction 

resembles that of the BRECs and German participation rights, in that they both are 

quoted participating loans. This form of property investment has not been 

implemented in Sweden. 

2.6. Property Indices 

Property indices describe the development of real estate prices and operating 

income. There are income return indices that describe the income on investments, 

price indices that monitor the price changes and total return indices that consider 

both the income on investments and the price changes. 

Indices are used for several purposes. They enable investors to compute holding 

period returns, the average return and the standard deviation for each of the asset 

classes. With this data, it is possible to calculate correlation coefficients between 

each pair of assets and thereby the optimal weight which should be allocated to each 

4 

The Swedish currency is converted into Euro according to Postgirots official exchange rate on 19 

November, 2002: 1 Euro = 9,08 SEK. 

5 

Published in Swedish: Fastighetsinvesteringsbolag (FIB) – ett reformförslag 

10


asset class. Indices are also used as benchmarks in performance measurement 

analyses. 

Several issues have to be addressed when constructing an index. Firstly, the method 

of weighting assets in the index must be considered. Two different methods have 

traditionally been used; the market capitalization weighting and the equally 

weighted method. With the former method, the weight of each asset is obtained by 

dividing the market value of that asset by the total market value of the properties 

included in the index, whereas with the latter method each asset is given the same 

weight. Modern information technology has facilitated the calculation of market 

capitalization weighting indices, and they are now the most common form. 

The construction of property indices raises issues not encountered in the securities 

markets, where indices have been used for a longer time. The first important 

problem is defining the property market that the index aims at describing. A 

thorough description of geographical and sectorial distribution of the included 

properties is essential for the evaluation of the index. The need to describe the 

included properties relate to another problem in the construction of property indices; 

that of sample selection. The heterogeneity of property investments makes any two 

indices based on different samples likely to produce different index values as a 

result of specific characteristics of properties. This is related to the problem if 

sample size; as the sample size increases, the property specific risks are diversified 

and the development of the index will approach that of the property market. This 

increases the quality of the index but implies higher costs. Finally, the lack of a 

central trading market with price information for property and infrequent trading of 

individual properties also created a problem. On some markets information on 

transaction prices are not available. Insufficient amounts of information have led to 

the construction of indices based on regular valuations of a sample of properties. 

2.6.1. Property Indices Available in the Investigated Countries 

Appraisal-based and market values weighted indices exist in several countries. Of 

the investigated countries, all but Belgium are covered by property indices. 

Investment Property Databank plans to start a Belgian property index, but the date 

of launch has not yet been announced. Below are short descriptions of the 

dominating property indices in the investigated countries. These indices are used as 

benchmarks for the return on directly held property in the following chapters. 

In the USA, the NCREIF Property Index (NPI) is the most widely used index 

(Hoesli & MacGregor, 2000). It has been published quarterly since 1978. The NPI 

is a market value weighted total return index. Income return and capital appreciation 

return indices are also calculated, as well as property type subindices and regional 

subindices. The property sectors included are apartment, industrial, office and retail 

properties, all held by tax-exempt institutions. The total market value of the 3956 

included properties were €141 billion at the end of the second quarter of 2002. 

The return on direct property investments in the Netherlands is measured by the 

ROZ/IPD Netherlands property index, which is published annually since 1996. The 

11


ROZ/IPD index is available as total return, income return and capital appreciation 

return indices. Subindices for retail, offices, residential, industrial, mixed use and 

other properties are available. The total value of the 6704 properties included in the 

ROZ/IPD databank was €38 billion in December 2001. Assuming that the value of 

the Dutch property market is about €40-45 billion, the ROZ/IPD index represents 

about 85% of the holdings of the financial institutions and quoted property 

companies. 

Portfolio performance of German properties can be benchmarked against the 

Deutsche Immobilien Index (DIX), published by the Deutsche Immobilien 

Datenbank. The DIX index is available as total return, income return and capital 

appreciation return indices. Subindices for retail, offices, residential properties, 

mixed use and other properties are available. The index was launched in 1996 and 

includes 2754 properties with a total market value of €36 billion. The total value of 

the German property stock that is available to investors is estimated to be around 

€265 billion and the holdings of institutional investors to about €117 billion. Thus, 

the DIX represents nearly 30% of the holdings of institutional investors. 

Several appraisal-based indices are available in the UK. The IPD annual index is the 

main UK property index (Hoesli & MacGregor, 2000). It is published since 1985 as 

total return, income return and capital appreciation return indices. The property 

sectors covered are retail, offices, industrial and other properties. The IPD annual 

index has by far the largest sample of all the UK property indices. It comprises of 

over 11900 properties with a total value of €162 billion. This is equivalent to 75% 

of the total property assets of UK institutions and listed property companies. A 

monthly index is also available, based on property unit trusts, pooled pension 

schemes and unit-linked insurance funds, a sample of 10% of the total UK market. 

The Norwegian property market is covered by the IPD Norway property index. The 

index is available as total return, income return and capital appreciation return 

indices. Total return subindices for retail, office, residential properties, other 

commercial and other properties are available. The index was launched in 2001 and 

includes 214 properties with a total value of €4 billion, corresponding to 25% of the 

value of the holdings of the financial institutions and quoted property companies. 

Table 1 below summarizes the properties of the above mentioned property indices. 

Table 1. Properties of the national property indices. 

Date of 

lauch 

Frequency of 

publishing 

12 

Value of included 

properties (€Bn) 

Estimated 

market coverage 

NCREIF Property Index 1978 Quarterly 141 N/a 

ROZ/IPD Netherlands 

Property Index 1996 Annually 38 85% 

Deutsche Immobilien Index 1996 Annually 36 30% 

IPD Annual Index 1985 Semi-annually 162 75% 

IPD Norway Property Index 2001 Annually 4 25% 

In the countries investigated in the next chapter, the development of indirect 

property investment vehicles have reaches different stages and taken different


forms. A number of factors, probably differing from market to market and over 

time, drive the investments in the property investment companies, funds and other 

investment vehicles. 

13


3. National Property Investment Vehicles 

3.1. USA 

3.1.1. Introduction 

Most publicly traded U.S. property companies elect to be taxed as real estate 

investment trusts or REITs (pronounced ’reet’) for short, according to JP Morgan 

(1999). In return for meeting certain restrictions established by the Internal Revenue 

Code, REITs are entitled to a tax deduction for dividends paid to their shareholders. 

This deduction allows shareholders to invest in real estate without the double taxation 

of income that is usual for investment in a corporate entity. 

REITs were established in 1960 as a way for small investors to invest in commercial 

real estate. At first, most REITs were sponsored by banks and used as a conduit for 

making speculative development loans that the banks were prohibited from 

underwriting. Since then, the legal framework governing the REITs has changed. In 

the 1980s and 1990s, the REIT industry benefited from tax reform initiatives that 

eliminated the incentive of tax sheltered real estate vehicles and also allowed REITs to 

manage their properties directly. In 1993, provisions removing barriers to pension plan 

investment in REITs were enacted, and four years later REIT operations were 

simplified. 

Currently, there are about 300 REITs operating in the United States. Their assets total 

over €340 billion, of which the listed REITs account for €192 billion. Since 1971 the 

total market capitalisation of REITs has grown by 17.5% per annum. (www.nareit.com, 

15 August 2002). Figure 1 below shows the development of the REIT industry between 

1971 and 2001. 

Number of REITs 

250 

200 

150 

100 

50 

0 

1971 

1974 

1977 

1980 

1983 

1986 

1989 

1992 

1995 

1998 

2001 

14 

200.000 

150.000 

100.000 

50.000 

Number of REITs Market Cap., 

€ million 

Figure 1. REIT industry evolution 1971-2001. 

Source: NAREIT 

Real estate operating companies are publicly traded real estate companies that have 

chosen not to be taxed as REITs. The three primary reasons for such a choice are the 

0 

Market cap., € millions


availability of tax-loss carry-forwards, operation in non-REIT-qualifying lines of 

business and the ability to retain earnings. 

3.1.2. Securitisation of Real Estate 

The market capitalisation of the REITs account for 1.6% of the total market 

capitalisation of the New York Stock Exchange. When compared to the Gross 

Domestic Product, the capitalisation of REITs is equivalent to 1.7%. Table 2 below 

describes the level of securitisation of real estate in the United States. 

Table 2. Gross domestic product 2001, market capitalisation of all listed REITs and 

the New York Stock Exchange on the 31 July 2002. 

Asset class Market cap. 

€ million 

REITs 170 166 

NYSE Capitalisation 10 489 300 

Gross Domestic Product 10 143 200 

Source: American Stock Exchange, NASDAQ, New York Stock Exchange, OECD. 

3.1.3. Real Estate Investment Trusts 

In order to qualify as a REIT, an entity must satisfy certain income and asset 

requirements designed to ensure that the preponderance of its assets and income are real 

estate related. The requirements are as follows (JP Morgan, 1999): 

Limitations on the business activity: 

• At least 75% of a REIT’s total assets must be investments in real estate, mortgages 

secured on real estate, shares in other REITs, cash and government securities; 

• At least 75% of a REIT’s gross income must be derived from real estate or 

mortgages secured on real estate; and 

Limitations on the ownership structure: 

• A REIT must be owned by 100 or more persons and must not be closely held. The 

expression ‘closely held’ means that there cannot be a defined concentration of 

direct or indirect ownership in the hands of a few individual investors. 

Other: 

• 90% of the taxable income must be distributed to the shareholders. Net capital 

gains, however, may be passed through by the REIT to its shareholders as capital 

gains. 

There are no restrictions on the level of gearing. Traditionally, the market-imposed 

loan ratios have been in the 35 to 40 percent region (Nareit, 2002:1). The geographical 

location of a REIT’s assets is not a parameter for the purpose of qualifying as a REIT. 

The maximum US tax on REIT dividends is the dividend withholding rate of 30 

percent, which is less than the maximum US ordinary income tax rates on corporate or 

individual investors. 

15


Beginning in 1992 a new type of REIT operating structure, the Umbrella Partnership 

REIT, or UPREIT for short, proved popular in attracting capital. The umbrella 

partnership REIT is a structure that combines various partnerships into a so called 

operating partnership, with contributing partners receiving limited partnership units. 

These units can later be exchanged for cash or REIT shares. Simultaneous with this 

partnership combination, a REIT is formed and shares are offered to the public. The 

REIT becomes the general partner in the operating partnership. The purpose of this 

structure is to avoid a ‘sale’ for accounting purposes and a corresponding tax on any 

built-in gain upon the combination. From 1993-1997, more than 63% of REIT initial 

public offerings used the UPREIT structure (Andersen, Robertson and Scott, 2000). 

The DownREIT structure resembles the UPREIT structure, except that the REIT owns 

substantial assets directly. By contrast, the principal asset of an UPREIT is typically 

its interest in the operating partnership. 

Based on the financial sectors in which the REITs invest, they may be divided into 

three categories; equity REITs, mortgage REITs and hybrid REITs. An equity REIT 

owns directly or has an equity interest in rental real estate. The main source of income 

for equity REITs is rents. Mortgage REIT makes or owns loans and other obligations 

that are secured by real estate collateral. Hybrid REITs combine the investment 

strategies of both equity REITs and mortgage REITs. 

Financial Data 

The average market capitalisation of the REITs is €957 million, but it differs over the 

categories of REITs, according to Nareit (2002:2). In the early 1970s, the market 

capitalisation of the mortgage REITs was larger than that of the equity REITs. Since 

then, both the number and the market capitalisation of the equity REITs have 

outnumbered those of the mortgage REITs. The hybrid REITs have always been a 

minority of the REITs. Table 3 below profiles the listed REITs by investment sector 

and average market capitalisation. 

Table 3. Investments sectors and average market capitalisation of the REITs. Data is 

from 1 April, 2002. 

Investment Number Average market 

sector of REITs Cap., € million 

Equity 150 1 096 

Hybrid 9 476 

Mortgage 20 204 

Industry total 179 


The ten REITs with the largest market capitalisation are listed in table 4 on the next 

page. As can be seen, most of them focus on the U.S. market, and specialise in only 

one property sector. 

16


Table 4. The ten largest REITs with regard to market capitalisation on 31 July 2002. 

Name Market cap. Investment Investment 

€ million sectors markets 

Equity Office Properties Trust 12 637 office USA 

Equity Residential 8 167 residential USA 

Simon Property Group Inc. 6 795 shopping centres USA, Europe 

Starwood Hotels & Resorts 5 868 hotels Internationally 

Plum Creek Timber Company 5 325 timberland USA 

ProLogis 5 073 industrial Internationally 

Archstone-Smith 5 019 residential USA 

Vornado Reality Trust 4 860 mixed USA 

AIMCO 4 275 residential USA 

Public Storage Inc. 

Source: New York Stock Exchange 

4 170 storage facilities N/A 

Investors 

Today, individual investors and mutual funds own most REIT shares (Nareit 2002:3). 

Exact and updated data on the ownership structure is not available, but a study from 

2000 suggest that shares are owned by a full range of institutional investors as well as 

private investors. Figure 2 below describes the ownership structure of the REITs. 

Individual 

investors 

47% 

Figure 2. Investor profile 

Source: Andersen et al, 2000. 

Investment Strategy 

Pension 

funds 

3% 

Banks 

5% 

Insurance 

5% 

Investment 

advisors 

40% 

The REITs generally specialise in one property sector. A large number of REITs 

invest in the retail sector, but the REITs investing in the sectors of industrial/office, 

residential and self storage property have a the highest average market capitalisation. 

Figure 3 on the next page describes the fraction of REITs in each property sector. The 

‘other’ category includes smaller niche markets such as lodging/resorts, healthcare, 

self-storage and speciality property investments. 

17


Figure 3. REITs by property sector. 


Performance 

Mortgage 

11% 

Other 

22% 

Diversified 

11% 

Residential 

13% 

Industrial/ 

Office 

19% 

Retail 

24% 

There are in total 196 REITs whose stocks are traded on the national stock exchanges 

as of August 8, 2002 (www.nareit.com, 8 August 2002). The listings are distributed as 

follows: 

• New York Stock Exchange - 153 REITs 

• American Stock Exchange - 34 REITs 

• NASDAQ National Market System - 9 REITs 

In addition to these, there are three REITs whose shares are traded on OTC-markets. 

When assessing the performance of REITs, it is interesting to compare it to that of 

investments in equities, bonds or property. The performance of the listed REITs may 

be tracked by the NAREIT index. It is a market value weighted index that contains all 

the listed REITs. The Standard & Poor’s 500 Index is an index of the 500 largest 

capitalised stocks in the United States that is widely recognised as a guide to the U.S. 

stock market. The return on bonds can be measured by the Merrill Lynch’s bond index 

containing government and company bonds. The return on directly held property 

investments may be measured using the NCREIF Property Index. It describes the total 

returns to the commercial real estate properties held for tax-exempt institutional 

investors. Figure 4 on the next page describes the development of equities, REITs, 

directly held property and bonds. 

18


Index, 1992=100 

450 

400 

350 

300 

250 

200 

150 

100 

50 

1991 

1993 

1995 

1997 

1999 

Figure 4. Return on investment 1992-2001. 

Source: NCREIF, NAREIT. 

19 

2001 

Equities 

REITs 

Property 

Bonds 

As can be seen in figure 4, the REITs showed negative results in 1998 and 1999. In 

2000 they recovered, but the equities market dropped significantly. Directly held 

property is the only form of investment that has showed a positive annual return every 

year of the decade. 

When the performance of the different kinds of REITs are compared, as can be seen in 

figure 5 below, significant differences are revealed. 

Index, 1971=100 

3500 

3000 

2500 

2000 

1500 

1000 

500 

0 

1971 

1975 

1979 

1983 

1987 

1991 

1995 

1999 

Equity REITs 

Hybrid REITs 

Mortgage REITs 

Figure 5. Development of the different kinds of REITs during the last thirty years. 

Source: NAREIT. 

In the long perspective, the equity REITs have performed far better than both 

mortgage and hybrid REITs. The same thing is true for the performance during the last 

decade, because equity REITs did not drop as much as the others. In a three-year 

perspective, however, the mortgage REITs have performed best.


3.1.4. Concluding Comment 

Securitisation of real estate has been available in the U.S. for a long time. For this 

reason, the REIT market is interesting to study. The American system of REITs is in 

many ways one of the best functioning system of property securitisation. The liquidity 

is very good and the sector capitalisation is high. 

It is interesting to note that the majority of the REITs have specialised in one property 

sector or sub-sector and invest in the U.S. only. The specialisation might be the result 

of the maturity of the sector, as it requires both liquidity and a large investment sector 

capitalisation. 

20


3.2. Belgium 


In Belgium, there are two ways to invest in property indirectly: by investing in 

Belgian Real Estate Certificates (BRECs) or in shares in a SICAFI (pronounced See- 

Cafy). These two instruments can be described as collective investments in real estate. 

Launched initially in 1965, the BRECs are tradable securities that entitle the holder to 

a proportionate share of property income and of the eventual sale proceeds. Both 

individuals and companies may buy the certificates. However, the certificates are not 

the standardised instruments that they were intended to be, and they are therefore not 

very liquid (Vinell, 1996). 

In order to promote collective investment in real estate activities, the Belgian 

authorities created the SICAFI vehicle in 1990. The SICAFI notation stands for 

societe d’investissement à capital fixé immobilière, which is a limited liability 

company with fixed capital. The legal framework for the SICAFIs is similar to that of 

the American REITs. The purpose of the introduction was to eliminate the lumpiness 

and illiquidity of the Belgian property market (Andersen et al. 2000). The first SICAFI 

was launched in 1995 and there are currently eleven SICAFIs listed on the Brussels 

stock exchange. In 2001, they accounted for 28% of all transactions of Belgian real 

estate (Catella Codemner, 2002). 


The SICAFIs account for 1.0% of the total market capitalisation of the Brussels stock 

exchange. When compared to the gross domestic product, the capitalisation of the 

SICAFIs is equivalent to just over 0.85% of the national output. Table 5 below 

describes the Belgian investment market. 

Table 5. Securitisation of real estate in Belgium. All figures are from the 31 December 

2001. 

Asset class € million 

SICAFIs 1 945 

BRECs 865 

Real Estate Shares 359 

Total Stock Exchange 186 258 

Capitalisation 

Gross Domestic Product 229 600 

Source: Euronext Brussels, OECD 

3.2.3. Belgian Real Estate Certificates 

The BRECs are transferable securities incorporating a debt. Generally, a BREC gives 

the holder the right to variable interest, a fixed depreciation spread over the lifetime of 

the certificate, and a share of the potential capital gain resulting from the realisation of 

21


the underlying asset. The lifetime of the certificate is usually between 15 and 25 years 

(Vinell, 1996). The predetermined amortisation of the debt to the certificate holders 

usually corresponds to the depreciation of the asset so that the interest distributed to the 

holders will correspond to the income obtained from the asset less the operating 

expenses, i.e. the company’s taxable result before deduction of interest. The main 

advantage of the BRECs, from a tax viewpoint, is that the income deriving from it is 

considered interest. 

The Banking and Finance Commission of Belgium requires that public emissions of 

BRECs are made by specialised bodies. The price of the investment is equally 

distributed among the certificates to be sold. The BRECs may be registered, and can be 

transferred without any formality. The rights of holders of the certificates are similar to 

those of a creditor and not to those of a joint owner (PriceWaterhouseCoopers, 2001:1). 

The certificate holder is not guaranteed to recover his investment if the underlying asset 

is sold with a loss, but it might also increase in value if the property is sold with a 

significant capital gain that is distributed to the certificate holders. Any distribution in 

excess of the refund of capital is tax deductible for the issuing company, as normal 

debenture interest charges would be. Thus, the issuing company’s taxable basis equals 

zero and it pays no taxes. The holder of the certificate on the other hand, pays Belgian 

withholding tax on interest for any amount received in excess of the refund of capital. 

Apart from the withholding tax, the certificate holders should not bear any tax charges. 

BRECs may be listed on the Euronext Brussels, where they accounted for 0.13% of the 

total turnover in 2001 (Euronext Brussels, 2002). 

3.2.4. SICAFIs 

The SICAFIs are closed-end investment vehicles best described as companies whose 

main activity is to invest in real estate. The legal status of a SICAFI is governed by the 

Royal Decree of April 10, 1995. It states conditions that have to be fulfilled by the 

company in order to qualify as a SICAFI. These are (PriceWaterhouseCoopers, 

2001:1): 

Limitations on the business activity: 

• Real Estate must be the unique core business. This term is defined broadly and 

includes real estate investments and related rights, shares of real estate companies, 

options on real estate, shares of other SICAFIs, real estate certificates and rights 

related to immovable leases; 

Requirements that aim at reducing the business risk: 

• Acting as a property developer or granting loans to companies other than its 

subsidiaries is not an approved business activity; 

• No single investment may exceed, in market value, 20% of the company’s total 

assets; 

• Debt must not exceed 50% of net assets, and interest charges may not exceed 80% 

of total income; 

• The properties must be valued regularly by an independent real estate valuer; 


22


• At least 30% of the shares of a SICAFI must be quoted on the Belgian Stock 

Exchange. The share capital must be at least €1 255 000; 

Taxation: 

• Rental income and capital gains from property sales are tax exempt if at least 80% of 

the profits are distributed; 

• Dividends distributed by SICAFIs are exempt from withholding tax provided that at 

least 60% of their assets are invested in Belgian real estate allocated to residential 

use. If this criterion is not fulfilled, the withholding tax is 15%; and 

• SICAFIs are subject to an annual tax of 0.06% on their net asset value. 

Most SICAFI choose not to invest at least 60% of their assets in residential property, 

and the dividend is thus subject to the 15% withholding tax. 


In the year 2001, there were 12 SICAFIs operating, representing a stock exchange 

capitalisation of €2437 million. The average market capitalisation was €203 million. In 

July 2001, the number of SICAFIs was reduced to eleven, as Siref was bought by 

Warehouse Invest. Table 6 below lists the SICAFIs active as of December 31 2001, 

their market capitalisation, sectors of investment and markets of investment. 

Table 6. Belgian SICAFI companies 2001. 

Market Cap., 

Investment 

Name 

€ million Investment sectors markets 

Confinimmo 690 Offices Belgium 

Befimmo 603 Offices 

Offices & Shopping 

Belgium 

Wereldhave Belgium 264 Centres Belgium 

Warehouses De Pauw 174 Semi-industrial Europe 

Intervest Retail 151 Retail, Warehouses Belgium 

Leaseinvest 129 Offices, Warehouses Belgium 

Intervest Offices 108 Offices Belgium 

Siref 94 Warehouses Belgium 

Retail Estates 69 Retail, Warehouses Belgium 

Serviceflats Invest 62 Residential Belgium 

Warehouse Estates 55 Mixed portfolio Belgium 

Home Invest 39 Residential Belgium 

Average 203 

The average velocity of the Euronext Brussels is 23%, which is significantly higher 

than the average velocity of the SICAFIs that is 7% (Euronext Brussels, 2002). 


The SICAFIs are important actors on the Belgian property market and accounted for 

around half of the transaction volume of Belgian real estate in 2001. They have tended 

23


to specialise. In general, however, there is a trend towards investments in the office 

segment. Figure 6 on the next page shows SICAFI investments by property class. 

Residential 

5% 

Semiindustrial 

13% 

Retail 

3% 

Mixed 

14% 

Office 

65% 

Figure 6. Investment sectors of the SICAFIs. 

Source: Andersen et al (2000) 

Although there are no restrictions on foreign investments, the SICAFIs have so far 

chosen to invest mainly in Belgian property. According to Andersen et al. (2000), only 

one of the SICAFIs invest outside of Belgium. 

Investors 

It has not been possible to conduct an analysis of the SICAFI shareholders. Such a study 

was made in 2000 though (Andersen et al., 2000), and the authors suggest that the 

average free float proportion is 59% of the shares. The low portion of free-floating 

shares may explain the relatively low velocity of the SICAFI shares. Harm Meijer, real 

estate analyst at ABN AMRO, suggest that the portion of private investors in the 

Belgian SICAFIs is larger than that of the Dutch FBIs 6 , but decreasing. He explains the 

decreasing fraction of private investors by the increasing market capitalisation of the 

sector (e-mail contact, 15 November 2002). 

Performance 

There is no property index available tracking the performance of Belgian real estate. 

There is a property index planned but the date of launch has not been publicly 

announced. It is therefore difficult to assess the correlation between the returns on 

investments in FBIs and directly held real estate. However, Andersen et al. (2000) 

suggest that SICAFIs in general have performed in line with the property market. The 

relative performance of the SICAFIs compared with that of long-term government 

bonds and the Brussels all-share total return index is shown in figure 7 on the next page. 

6 The Dutch FBIs will be described in the next chapter. 

24


Index, 1989=100 

350 

300 

250 

200 

150 

100 

50 

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 

Figure 7. Return on investments, 1989 – 2001. 

Source: E-mail contacts with Ecowin and EPRA. 

25 

Bonds 

Equities 

SICAFIs 

As can be seen, the development of the SICAFIs, as described by the EPRA Belgium 

total return index, is influenced by the development of the Brussels All-Share total 

return index. The fluctuation of the SICAFI-shares is not as strong as that of shares in 

general, but the tendency is the same. The influence of the property sector on the share 

price of the SICAFI is evident in the beginning of the 1990s and the 2000s. The crisis of 

the property sector in the beginning of the 1990s caused a deeper fall of the SICAFIshares 

than for other shares, but in the general recession at the beginning of the new 

century, the property sector remained stable and the value of the SICAFI-shares 

increased. In a five-year perspective, the SICAFIs have rendered an increase in value of 

45%, compared to 64% for equities and 28% for 10 year government bonds. 


Since the introduction of the SICAFIs, the securitisation level in the property sector has 

increased from a comparably low level. The key success factors of the SICAFIs are the 

liquidity of the shares, the risk diversification and the tax transparency. In conclusion, 

the introduction of the SICAFIs has broadened the investor-base for the property 

industry and grown rapidly in terms of market capitalisation.


3.3. The Netherlands 


The most widely used vehicle for indirect property investments in the Netherlands is 

real estate funds. In 2001, they accounted for 8% of the property transactions in the 

Netherlands (Catella Property Consultants, 2002). 

Open-end funds or investment companies that meet certain requirements set forth by the 

Dutch Central Bank may be classified as Fiscal investment institutions (Fiscale 

Beleggingsinstelling, FBI). FBIs were introduced in 1969 in order to stimulate 

individuals’ collective investment in real estate by removing the disadvantage caused by 

corporate taxation (Van Dijk, 13 November 2002.). Funds or companies that meet the 

requirements are subject to corporate income tax at a rate of 0%. The maximum tax 

burden on profits paid out by a FBI is 60%, compared to non-FBIs who are subject to a 

maximum of 74% (Johnston, 2000). 

Other tax efficient ways of investing in Dutch real estate are private funds and foreign 

real estate funds. Private funds benefit from favourable rules of taxation, but their 

shares or trust units are non-tradable or tradable only to a limited extent. For this reason, 

in combination with the lack of information available on private funds, the focus of this 

section about the Netherlands will be on the listed FBIs. 


The market capitalisation of the SICAFIs correspond to 1.8% of the total stock market 

capitalisation in the Netherlands. When compared to the gross domestic product, the 

total capitalisation of the FBIs is equivalent to 3.1% of the national output. Table 7 

below describes the Dutch property investment market. 

Table 7. Securitisation of real estate in the Netherlands. 


Listed FBIs 12 022 

Total Stock Exchange 


649 986 


Source: Euronext Amsterdam, OECD 

AP Fastigheter (2002) estimate that 30% of the property investments are done in 

indirect property investment vehicles. 

3.3.3. Fiscale Beleggingsinstelling 

Open-end funds and investment companies are in principle subject to corporate income 

tax. If certain conditions are met, an open-end fund or investment company may qualify 

for a special tax status. Such funds or investment companies are called fiscale 

beleggingsinstelling (FBI), or investment institution. An investment institution is not 

subject to corporate income tax. 

26


The most important difference between funds and investment companies is their legal 

status. An open-end fund has not a legal personality, whereas investment companies are 

corporate entities. The most frequently used entities for the investment companies are 

the private limited liability company (besloten vennootschap) and the public limited 

liability company (naamloze vennootschap). The investment companies may be listed 

on the Amsterdam stock exchange, but the open-end funds may not. Instead, they have 

to unconditionally repurchase units or shares at the holder’s request and make daily 

calculations of the net asset value per unit. 

In order to obtain and maintain the status of FBI the following conditions must be met 

(PriceWaterhouseCoopers, 2002:1): 

Limitations on the line of business: 

• The fund’s statutory purpose and its actual activities must solely consist of 

investing; 

Requirements that aim at reducing the business risk: 

• Total borrowings may not exceed 60% of the fiscal book value (cost less 

depreciation) of their immovable property and 20% of the fiscal value of other 

investments; 


• If the FBI is quoted on the Amsterdam stock exchange, 45% or more of the total 

number of shares may not be held by one taxable corporate entity, nor may a single 

Dutch individual own more than 25% of the shares; 

• No single non-resident natural person or single non-resident company may hold 

25% or more of the shares of a fund. 

• If the FBI is not quoted on the Amsterdam stock exchange, 75% or more of the 

shares should be held by individual shareholders and/or corporate entities not 

subject to profits tax and/or by a listed investment institution. Furthermore, 5% of 

its shares or certificates (a so called substantial interest) may not be held by one 

single individual; and 

Other: 

• A FBI must distribute all its taxable income (after deduction of permitted 

reservations) as dividends to its shareholders within eight months following the end 

of the financial year. The income must be distributed proportionally on all shares 

and participation certificates. FBIs are allowed to credit capital gains and losses to 

a reinvestment reserve which does not have to be distributed; 

A FBI may form a reinvestment reserve for the balance of capital gains and losses 

realised on its investments and certain unrealised gains and losses. It will not be 

required to distribute that part of its taxable income, which is reserved in this way. The 

investment institution may use the reserve to maintain consistent distributions to the 

shareholders by transferring or releasing capital to or from the reserve. 

The dividend is taxable as income at the unit holders/investor level. For Dutch private 

investors, the income tax is maximum 60% (KPMG, 2002). In addition, there is a 

special category of FIBs whose shares are wholly or partly owned by a Dutch pension 

fund. Because pension funds are exempt from income tax, the dividend paid out by 

27


these FBIs is not taxed at a shareholder level (Johnston, 2000). This means that the 

pensions fund’s direct and indirect property investments are directly comparable. 


The year 2002 has seen four listed FBIs being taken over. The number of listed property 

investment funds on the Amsterdam stock exchange has fallen from 13 to 8 in the first 

half of 2002 (Het Financieel Dagblad, 2002). Most stocks are part of indices such as the 

Euronext 100 index and the Next 150 (ABN Amro, 2002). Dexia Securities acts as 

liquidity provider on Euronext Amsterdam for eight of the listed property funds. The 

average free float percentage is 75%. Valuations are underpinned by on average 13% 

discounts to net asset values (Dexia Securities, 2002). Table 8 below describes some 

key data on the FBIs. 

Table 8. Market capitalisation, investment sectors and markets of the listed FBIs, 31 

December 2001. 

Market cap., Investment 

Name 

€ million sectors Investment markets 

Nieuwe Steen Investments 3 363 Offices, retail Netherlands 

Rodamco Asia 2 394 Offices, residential Asia 

VastNed Retail 1 810 Retail Netherlands, Germany 

Corio 1 504 Retail Netherlands 

North America, UK, 

Wereldehave 1 164 Offices, retail Netherlands 

VastNed Office/Industrial 682 Offices Netherlands 

Rodamco Europe 479 Retail Netherlands, Sweden 

Amstelland 362 N/a N/a 

Eurocommercial Properties 264 Retail Italy, France 

Average 

Source: Dexia Securities, 2002. 

1 336 

According to Dutch law, maximum gearing is 60%. The average level of gearing (gross 

interest bearing debt / total assets) was 44,7% in 2001 (ABN AMRO, 2002). 

The Dutch FBIs tend to be larger than Belgian SICAFIs, because the FBIs have been 

active for a longer period of time. In addition, the Netherlands has a highly developed 

pension fund industry, which invests large sums in FIB companies (Fickes, 2002). 


The Dutch FBIs generally invest in two to three sectors with a majority of assets in one 

sector. In 1992, the total asset mix of the Dutch companies consisted of 66% offices and 

27% retail. At the end of 2001, the total asset mix was switched around – 61% retail and 

30% office. Residential property is not held by any of the listed FBIs. Figure 8 to the 

left on the next page describes the property sectors of investment in 2001. To the right, 

figure 9 describes the country mix of the listed Dutch FBI companies in 2001. 

28


Office 

30% 

Figure 8. Sectors of investment 2001. Figure 9. Regions of investment 

2001. 

Source: ABN AMRO (2002) Source: ABN AMRO 2002 

Considering the location of the assets, the FBIs have focused their strategy during the 

last ten years. After the real estate crisis in the beginning of the 1990s and major 

disappointments in the Anglo-Saxon markets and in Germany, most Dutch companies 

reduced and focused their foreign exposure. The exposure to the Netherlands has 

increased from 35% in 1992 to 49% in 2001. Holdings in Germany, UK and US have 

dropped significantly. 

Investors 

Industrial 

7% 

The Dutch pension fund industry invests large sums in Dutch real estate. The two 

largest pension funds, ABP and PGGM, are important shareholders of the FBIs. ABP is 

the largest shareholder of Corio and Rodamco Asia. PGGM is the largest shareholder of 

Eurocommercial Properties, Rodamco Europe and VastNed Retail (Dexia Securities, 

2002). 

Harm Meijer of ABN AMRO estimates the fraction of private investors in the FBIs to 

be about 25%, which is less than that of the Belgian SICAFIs and the American REITs 

(e-mail contact, 15 November 2002). 

Performance 

Other 

2% Rest of 

Europe 

23% 

France 

16% 

Retail 

61% 

Figure 10 on the next page describes the return on investments in the Netherlands. As 

can be seen, equities have been the best investment over the period. The total return 

from investments in FBIs, described by the GPR Netherlands index, has been in line 

with that from bonds. Because the FBIs have to distribute their income to the 

shareholders, their only possibility to grow is to do so organically. This fact and the 

limit on the allowed level of gearing make shares in a FBI a cautious form of 

investment. 

29 

Spain 

9% 

North 

America 

3% 

Netherlan 

ds 

49%


Index, 1994=100 

390 

340 

290 

240 

190 

140 

90 

1994 1995 1996 1997 1998 1999 2000 2001 

Figure 10. Returns on investments in the Netherlands 1994-2001. 

Sources: ROZ/IPD, Dexia Securities 2002, ROZ//IPD, EPRA. 


The Dutch market for FBIs are in a phase of consolidation. More take-overs might be 

accomplished in the coming year. The FBIs are more focused in their choice of sectors 

to invest in than other multi-asset property investment vehicles such as the Belgian 

SICAFI or the German open-end funds. This might be the result of the age of this sector 

in combination with its relatively large market capitalisation. 

30 

Bonds 

Amsterdam All- 

Share index 

ROZ/IPD 

property index 

GPR Netherlands 

index


3.4. Germany 


The German market for indirect property investments is well developed. The two 

principal investment vehicles are open- and closed-end real estate funds. Both benefit 

from favourable rules of taxation. The open and closed-end real estate funds serve 

different needs and objectives of investors, as the former must have a diversified 

portfolio consisting of at least ten properties, whereas the latter usually invests in only 

one property, or occasionally in up to five properties. 

Real estate funds were introduced on the German market in the late 1950s. Since their 

introduction, both the number of funds and the total assets have grown significantly. In 

2001, every fourth purchase of German commercial property was bought by a real 

estate fund (Dagens Nyheter, 14 August 2002). The main reasons for their popularity 

are favourable rules of taxation, lack of a tradition of equity investments, a low risk 

combined with relatively high yields and good profitability for banks selling shares. 

Investors seeking exposure to the German property market may also invest in 

participation rights in German property companies. This is a form of participating 

loan. As the market for real estate funds is much larger, the focus of this chapter will 

be on real estate funds and in particular on the open-end real estate funds. 


The level of property securitisation in Germany is comparably high. Table 9 below 

describes the allocation of real estate capital and national wealth. 

Table 9. Securitisation of Real Estate in Germany. 


Open End Funds (public and 

special funds) 

77 700 

Closed-end Funds 4 360 

Real Estate Shares 12 709 



1 203 681 


Source: Bundesverband Deutscher Investment- und Vermögensverwaltungs-Gesellschaft (BVI), Allianz Dresdner 

Immobiliengruppe, Bankhaus Ellwanger & Geiger, Deutsche Börse, OECD. 

Securitisation of real estate represents 7.9% of the total stock market capitalisation in 

Germany. In particular, the asset value of the open-end funds correspond to 6.5% of 

the stock market capitalisation. When compared to GDP, the capitalisation of openend 

funds in Germany is equivalent to just over 4.2% of the national output. It is worth 

noting that the value of the open-end funds is equivalent to just over 50% of that of 

equity funds, according to Bundesverband Deutscher Investment- und 

Vermögensverwaltungs-Gesellschaft (BVI) (www.bvi.de, 10 October 2002). 

31


The asset value of the open-end funds was less than five billion Euros during the first 

30 years of their existence. However, since in the early 1990s, the funds have grown 

rapidly. The asset value of the open-end funds were €67.7 billion at the end of 2001, 

with a cash inflow of €6.8 billion during the first quarter of 2002 (Baum, 2002). Figure 

11 below describes the total asset value during in the period 1989 to 2001. 

€ billlion 

60 

50 

40 

30 

20 

10 

0 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

Figure 11. Development of the fund value of the German open-end real estate funds 

1989-2001. 

Source: Bundesverband Deutscher Investment- und Vermögensverwaltungs-Gesellschaft (BVI) 

3.4.3. Participation Rights 

An investor may acquire participation rights, or Genüssrechte, in a real estate 

company. Participation rights are a form of participating loan. There are three common 

forms of participation rights; firstly those which yield a fixed interest, secondly those 

with a yield dependent on the profit of the issuing company and lastly those which are 

a combination of the two forms mentioned (www.emissionsmarktplatz.de, 16 July 

2002). The characteristics of participation rights make them a crossover between 

equities and bonds. 

Participation rights are not defined by law, but are used frequently by listed 

companies. The rights are contractual and can be documented by bearer or registered 

certificates that can be listed on a stock exchange. The holder of the participation 

rights has no voting rights and cannot participate in shareholder or management 

meetings. If the yield of the participation right is dependent on the company’s profit 

and may be negative, the issuing company may balance the capital as equity. Nonlisted 

participation rights are less liquid but may be sold by brokers. Usually, the 

participation rights are sold back to the issuing company after ten to fifteen years, but 

they may also be issued for an unlimited period of time. Income from participation 

rights is taxed as income from capital. Capital gains that are realised after less than 

one year of investment are taxed (www.adig.de, 17 July 2002). This does not apply for 

funds realising capital gains. 

None of the seven largest funds holding participation rights have an explicit policy to 

hold rights in real estate companies, nor are there any listed participation rights in real 

estate companies. 

32 

1998 

1999 

2000 

2001


3.4.4. Closed–end Real Estate Funds 

Closed-end funds, or Geschlossene Immobilienfonds, represent an important share in 

the real estate investment market. A closed-end fund issue a fixed number of shares in 

order to raise capital, which they then invest in property. There are no statutory 

regulations, but closed-ended funds are normally in the form of limited partnerships 

(GmbH & Co. KG) or civil law partnerships (GbR 7 ), according to 

PriceWaterhouseCoopers (2001:2). As limited partnerships and civil law partnerships 

may not be listed, there is no functioning secondary market for shares in closed-end 

investment funds. Therefore, the issuer of the fund often acts as market maker. 

However, investing in a closed-end fund is basically a long-term investment. 

The fact that closed-end funds are not listed makes it difficult to monitor the market 

volume. Allianz Dresdner Immobiliengruppe (2002) estimates the volume of placed 

equity capital to around €4.36 billion in 2001, resulting in a fund volume of €9.0 

billion. About half of this capital was invested in German real estate, and the other half 

in foreign properties. Of the foreign markets, the U.S. market received the most 

capital, followed by the Dutch market. Figure 12 below describes the development of 

closed-end real estate funds. 

€ billion. 

14,0 

12,0 

10,0 

8,0 

6,0 

4,0 

2,0 

0,0 

1993 1994 1995 1996 1997 1998 1999 2000 2001 

Equity capital Fund volume 

Figure 12. Development of closed-end real estate funds 1993-2001. 

Source: Allianz Dresdner Immobiliengruppe 

The historically relatively high yields obtained from closed-end funds have 

encouraged many investors to participate. The investors are mainly German 

individuals with a high income (PriceWaterhouseCoopers, 2001:2). The minimum lot 

size is generally not lower than €25 000, according to an article by the BVI. The IBG- 

Gruppe is the market leader in organising closed-end real estate funds. 

7 The civil law partnership or Gesellschaft bürgerlichen Rechts (GbR) has no separate legal 

personality, and its assets belong to its partners as their communal property. As a civil law entity, it 

does not have to be recorded in the commercial register. 

33


The investment in closed-ended funds is tax-driven. The income is taxable in the 

category of income rentals and royalties. This tax benefit does only apply for closedend 

funds. Furthermore, the funds benefited from special depreciation rates for 

buildings in the new German federal states. However, reduced tax benefits have forced 

closed ended funds to rethink their strategy and focus more on yield. This has also 

reduced their attractiveness to investors. 

3.4.5. Open–end Real Estate Funds 

The term open-end arises from the fact that the investment fund continually creates 

new shares on demand. Investors buy the shares at net asset value and can redeem 

them at any time at the prevailing net asset value, which may be higher or lower than 

the price at which the investor bought. The statutory requirement for open-end funds, 

including their construction, regulation and tax treatment, is based on the 

Kapitalanlagegesetz. 

Real estate investment funds are exempt from income tax and capital gains tax. 

However, new fiscal legislation will ensure that capital gains made from property sales 

will be liable for taxation. The net income of the open-end fund is directly attributed to 

the shareholders, regardless of whether it is retained or distributed. However, all 

income derived by German residents through the fund is taxable as income from 

capital. 

In order to qualify for tax benefits, the funds must meet a number of requirements. 

These requirements may be divided into groups according to their purpose, as stated 

below. 

Requirements that aim at reducing the risk: 

• The fund must consist of at least ten items of real estate within four years of 

establishment; 

• The value of an individual asset may not exceed 15% of the value of the portfolio 

at the time of purchase; 

• Loans may only be taken up to an amount not exceeding 50% of the value of the 

fund’s assets; 

Limitation on the ownership structure: 

• The fund may not have more than ten investors that are not individuals; 

Limitation on the allowed line of business: 

• At least 50% of the total portfolio value needs to be invested in real estate. Real 

estate in this sense include commercial as well as residential property, property 

under development, undeveloped real estate, land and equity holding of real estate 

companies; 

• A maximum of 20% of the fund’s asset may be invested in property under 

development and in equity holdings of real estate companies respectively; and 

Other: 

• 5% of the funds’ assets must be held in a bank account or invested in securities 

which qualify as collateral for refinancing purposes with the Federal Bank. 

On average, 72% of a fund’s assets are invested in real estate (Leimdörfer, 2002). 

34


Banks control most of the retail market for the open-end property funds. Shares in 

open-end property funds is a profitable product for the banks, with provisions of up to 

5%. This distribution channel touches a mainly middle-class consumer base with a 

high disposable income for savings (Berry et al. 1999). Pension investment funds are 

also able to invest in units of open-end real estate funds. Shares in property funds start 

at about €50 (BVI, 2002). 

Open-end real estate funds appear in two forms: the most common is the public form, 

which is designed for an indefinite number of investors, and the special fund for a 

limited number of investors. The special funds allow a maximum of ten shareholders, 

although is could also consist of a single investor. Only institutional investors are 

allowed. Shareholder’s certificates may not be transferred without the permission of 

the fund manager. There are currently 44 special funds with a total asset value of €10 

billions at the end of 2001 (Baum, 2002). Many of the fund managers offering public 

open-end real estate funds, also manage special funds. The rest of this chapter is 

devoted to public open-end funds, because there is little or no information available on 

the special funds. 


In total, there were 20 open-end real estate investment funds active as of July 12, 2002 

(pressrelease by BVI, 12 July 2002). Their average market capitalisation was €3 300 

million. Table 10 on the next page lists the open-end funds, the fund managers, the 

market capitalisation, type and the markets in which they invest. 

35


Table 10. German public open-end funds, sorted according to market capitalisation on 

21 October 2002. 

Public Open-end Real 

Estate Fund Fund manager 

Commerz Grundbesitz 

Haus-Invest 

DIFA-FondsNr. 1 

36 

Asset value € 

million 

Dominating 

investment 

sectors 

Investmentgesellschaft 9 127 Offices 

Dominatin 

g 

investment 

markets 

UK, 

Germany 

Deutsche Immobilien 

Fonds 7 842 Offices Germany 

Deka-ImmobilienFonds DEKA Immobilien 

DB Real Estate 

7 823 Offices Germany 

Grundbesitz-invest Investment 

Deutsche Gesellschaft 


Grundwert-fonds für Immobilien 6 846 Offices Germany 

Germany, 

Deka-ImmobilienEuropa DEKA Immobilien 

Deutsche Immobilien 

6 819 Offices UK, USA 

DIFA-GRUND Fonds 3 716 Offices Germany 

SEB ImmoInvest SEB Immoinvest 3 018 Offices Germany 

Credit Suisse Asset 

Germany, 

CS Euroreal 

Management IMMO 2 674 Offices Netherlands 

WestInvest 1 Westinvest 2 605 Offices Germany 

DB Real Estate 

France, 

Grundbesitz-global Investment 

Internationales 

1 803 Offices Sweden 

iii-Fonds Nr. 2 Immobilien Institut 



iii-Fonds Nr. 1 Immobilien Institut 1 209 Offices Germany 


UK, 

iii-Fonds Nr. 3 Immobilien Institut 973 Offices Germany 

Aachener Grund-Fonds Aachener 

Nr.1 

Grundvermögen 835 Retail Germany 

SKAG Euroinvest Siemens 

Immobilien 

Kapitalanlagegesellschaft 811 N/A N/A 

Germany, 

WestInvest InterSelect Westinvest 800 Offices Netherlands 

HANSA immobilia Hansa Invest 558 Offices Germany 

Credit Suisse Asset 

Offices, 

CS-WV Immofonds Management IMMO 

AXA Investment 

150 

Retail Germany 

AXA Immoselect Managers 28 Offices Europa 

Sources: Fund asset values: BVI, all other information stems from the hompages of the respective 

funds. 


Most open-end funds own between 50 and 100 properties. The properties are 

characterised as large, modern and with long-term lease contracts. The funds invest 

mostly in the office and prime retail property sectors, according to Deutsche 

Immobilien Datenbank (2001). To a large extent, the property is located in the regions


of Rhein-Main and Rhein-Ruhr or the conurbations of Hamburg, Berlin, Stuttgart and 

Munich. It was only in 1990 that all funds were allowed to invest abroad, and lately 

the percentage of assets hold abroad have increased rapidly from on average 20% in 

1998 (BVI, 1999) to 30% in 2000 (BVI, 2002). Until July 2002, the fractional share of 

investments in non-European countries were limited to 20% of the NET ASSET 

VALUE of the fund. The new law stipulates no restrictions on foreign investments. Up 

till now, the main foreign markets have been Holland, Belgium, France, UK and the 

USA (Deutsche Immobilien Datenbank, 2001). Figure 13 below left shows the regions 

of investment of the open-end funds. To the right, figure 14 describes the source of 

European 

non-EMUcountries 

15% 

EM Ucountries 

16% 

income of the open-end funds broken down to property sectors. 

Figure 13. Regions of investment. Figure 14. Sectors of investment 

Source: BVI 2002. Source: BVI 2002. 

The diversity of the German real estate funds’ assets is the main reason for their 

attractiveness among German private investors, but make them less attractive to 

investors seeking a focus. 

Performance 

Noneuropean 

countries 

4% 

Germany 

65% 

Generally, the investment funds invest in newer property in prime locations. 

Therefore, the portfolios of the investment funds are neither representative of the 

German property market, nor mirroring the properties underlying the DIX property 

index. Thus, there is no perfect benchmark to compare the performance of the openend 

funds against. 

37 

Hotel 

3% 

Warehouse 

/Service 

5% 

Retail 

16% 

Others 

4% 

Offices 

72%


Index, 1995=100 

325 

275 

225 

175 

125 

75 

1995 1996 1997 1998 1999 2000 2001 

Figure 15. Return on investments. 

Source: Bankhaus Ellwanger & Geiger, Allianz Dresdner Immobiliengruppe, DID 

38 

Equities 

Property shares 

Bonds 

Property funds 


Figure 15 above describes the yield of the German share index (DIX), Ellwanger & 

Geiger’s property shares index, DIX property index, an index of open-end real estate 

investment funds and bonds are compared. 

As can be seen, the property shares index follows the German share index. The 

German open-end funds have shown a positive return throughout the period. It has 

followed the return on bonds nearly perfectly. However, the favourable taxation makes 

property funds a better investment, as on average 40-50% of the yield is tax-free. The 

low risks in combination with a yield higher than the return on bonds are the main 

reasons behind their popularity. 


The German open-end property funds have continued to grow in 2002, because of 

sinking market prices at the German stock exchanges. The net inflow of capital was 

€10 062 million during the first six months of 2002 (www.bvi.de, 15 October 2002). 

As the majority of assets have to be invested in real estate, the cash inflows create a 

pressure for the fund manager to invest. This makes the investments of open-end funds 

liquidity driven rather than by real estate opportunity. During the first six months of 

2002 €9.3 billion was invested, two thirds of which was invested abroad (BVI 

pressrelease 12 July 2002). The new legislation on foreign investments is likely to 

prolong the trend of foreign investments. 

A new fiscal policy has come into effect and will affect the real estate funds. It states 

that open-end funds are to pay capital gains tax, and it is likely to make the funds less 

active. In the long run the changing rules of taxation are likely to make both closed- 

and open-end funds less attractive to investors.


3.5. The United Kingdom 


The property market of the United Kingdom is the largest, most liquid and most 

transparent of the European property markets (AP Fastigheter, 2002). The 

development of indirect property investment vehicles has reached further than in any 

other European country. There are many vehicles through which exposure to property 

can be gained indirectly, both real property vehicles and synthetic property vehicles. 

Synthetic property investment vehicles generate income and capital flows to investors 

according to the performance of the benchmark index for property, the IPD Annual 

Index. Examples of synthetic investment vehicles are property index certificates, 

property index forwards and property index notes. Synthetic property vehicles are 

beyond the scope of this report, but are mentioned because of their uniqueness on the 

European property market. 

Real property investment vehicles are vehicles where the underlying properties 

themselves provide the income and capital flows to investors. Examples of real 

property investment vehicles available in the United Kingdom are unauthorised 

property unit trusts, authorised property unit trusts and mutual funds. Limited 

partnerships are also used to a large extent for property investments. The last five 

years have seen a rapid rise in the use of private equity vehicles rather than direct sole 

ownership or use of public listed property companies. The reason for this was 

favourable terms of investment at the London market present at that time. It has been 

argued that the total gross asset value of real estate held in private vehicles may now 

exceed that held by listed property companies. 


The market for property securitisation is well developed in the United Kingdom. 

Royal & Sun Alliance (2001) estimate that pension funds hold about 23% of their total 

exposure to real estate in indirect property investment vehicles (including PUTs but 

excluding property equities). 

The indirect investment market is currently dominated by limited partnerships (DTZ, 

2001). But because both unauthorised property unit trusts and limited partnerships are 

unlisted, the portion of listed property investment vehicles is quite small. The value of 

the ten largest limited partnerships exceeds €5.7 billion 8 (DTZ, 2001) and over €6.5 

billion in the ten largest unauthorised property unit trusts (Baum, 2001). 

RussellmellonCAPS publishes current values of unit trusts. Table 11 on the next page 

shows the level of securitisation in the United Kingdom. 

8 

The currency rate used is the daily average from 28 December, 2001. 1 GBP = 1,6356 EUR 

(www.svt.se/nyheter/2001/011231/230.html). 

39


Table 11. Property Securitisation in the United Kingdom. 


Private property vehicles 55 285 

Quoted property vehicles 36 638 


2 491 932 



Source:Baum, London Stock Exchange, OECD. 

Securitisation of real estate represents 3.7% of total stock market capitalisation in the 

United Kingdom. When compared to gross domestic product, the total capitalisation of 

property vehicles is equivalent to 6.0% of the national output. 

3.5.3. Limited Partnerships 

The limited partnership enables a pool of investors to invest together in one or more 

assets. An UK limited partnership (LP) is a vehicle in which those partners who do not 

participate in the management of the business have limited liability. The investment is 

thus passive. The number of investors is limited and partnerships cannot be traded on 

the Stock Exchange. 

Limited partnerships offer investors tax transparency, because there is no capital gains 

or income tax payable at the partnership level. In the UK jurisdiction, up to twenty 

limited partners can participate in a limited partnership, although more investors can 

be involved through the use of feeder funds. The average number of investors is five 

(ABN AMRO / IPD, 2002). One general partner is responsible for running the 

partnership and is also liable for the debts of the limited partnership. Whilst the limited 

partners benefit from the fact that their liability is restricted to the amount of capital 

they have invested, they are prevented from taking an active role in the management 

of the partnership or would lose their limited liability status. 

The actual number of partners varies, with some using the structure as a ‘club’ scheme 

consisting only of a few partners, and others tend to operate as collective investment 

schemes. The life span of a limited partnership generally runs for around seven to ten 

years (DTZ, 2001). When the partnership ends, assets are sold and capital returned to 

investors, although some partnerships are extended. The initial partnership agreement 

stipulates the level of gearing allowed. The average level of gearing among those 

limited partnerships with debt was 59% (ABN AMRO / IPD, 2002). 


DTZ (2001) estimates that there are currently around 90 limited partnerships that can 

be described as collective investment schemes, with total investment standing at 

approximately €17.5 billion. The value of assets held in limited partnerships is now 

thought to be greater than the total value of assets held in all other indirect vehicles, 

excluding property company equities. The ten largest limited partnerships account for 

at least €5 420 million of total investment. Table 12 below profiles the ten largest 

limited partnerships. 

40


Table12. The ten largest limited partnerships sorted according to market 


Sectors of Asset Launch Level of Number of 

Name 

investment value €m date gearing investors 

The Mall Partnership retail 1067 2002 50% 2 

Industrial Property Investment Fund industrial 702 1997 30% 7 

Oracle Limited Partnership retail 535 1997 n/a 2 

The Junction Partnership retail 535 2002 50% 2 

UK Prime Property Partnership retail 480 1991 n/a 12 

Victoria Centre partnership retail 450 1991 0% 2 

Ashtenne Industrial Fund industrial 430 2001 20% 2 

Benchmark JER I office 430 2000 n/a 2 

Unicycle Limited Partnership retail 417 2002 85% 3 

MWB Leisure Fund Iia 

Source: ABN AMRO / IPD 2002. 

leisure 374 1997 61% 8 


The majority of the limited partnerships are specialised funds. All of the ten largest 

limited partnerships hold all their assets in just one property sector. The three most 

common property sectors of investment are shopping centres, industrial and offices 

(DTZ, 2001). Figure 16 below describes the investment sectors by capital value of the 

limited partnerships. 

Office 

21% 

Residential 

3% 

Industrial 

13% 

Leisure 

6% 

Other 

2% 

Retail 

55% 

Figure 16. Investment sectors of the limited partnerships, by capital value. 

Source: ABN AMRO / IPD 2002 

Diversified funds are a minority of the limited partnerships. Only about 15% of the 

market by value consists of limited partnerships with diversified property portfolios. 

One reason for the popularity of the specialised funds might be the access to 

specialised management skills combined with the possibility to diversify by to holding 

shares in many funds. 

41


Investors 

An assessment of limited partners by DTZ (2001) reveals that there is no single 

dominant investor type. However, insurance companies and pension funds together 

account for nearly half of the investors in the limited partnerships, with pension funds 

being the largest single holder of interests in limited partnerships. Almost half of all 

insurance funds and just over a third of pension funds have exposure to limited 

partnerships (Royal & Sun Alliance, 2001). Whilst most funds with exposure to 

limited partnerships have interests in just one such vehicle, the average number of 

partnerships for funds holding assets in this type of vehicle is four for both pension 

funds and insurance companies (Royal & Sun Alliance, 2001) Since the institutions 

are exempt from tax on investments they receive the same treatment for their earnings 

and capital gains as they would if they had made a direct property investment. 

The top five investors account for more than €3.2 billion of investment in limited 

partnerships. This is a substantial amount given that overall investment in limited 

partnerships investing in property is around €17.5 billion, a significant proportion of 

which is comprised of debt from capital gearing. The average level of investment 

amongst all the partners that DTZ assessed was over €80 million, with a median 

investment level of around €40 million. 

The majority of general partners are investment managers such as Aberdeen Property 

Investors or Barclays Property Investment. Property companies are also significant in 

the profile of general partners, particularly property companies with specific expertise. 

Performance 

Data from the IPD (ABN AMRO / IPD, 2002) suggest that the limited partnerships 

have under-performed the other fund types in a three-year perspective, with an 

annualised average return of 9.8% compared to the IPD universe of 10.8%. It is 

however difficult to compare immature limited partnerships with established funds, as 

the limited partnerships have paid high acquisition costs in the period of their 

establishment. 

Currently, limited partnerships may only be listed on the Dublin stock exchange. DTZ 

predicts that any listing of limited partnerships is unlikely in the short to medium term 

in the UK. There is no established secondary market for shares of a limited 

partnership. The liquidity of shares in limited partnerships varies between the funds, 

but the general opinion among both investors and advisors and managers is that 

property is more liquid than shares in a limited partnership. Generally, funds with high 

fees and pre-emption rights allowing existing partners to match any offer made by an 

outside potential investor may suffer from liquidity issues through mis-pricing. The 

pricing of shares is often carried out by appraisers and based on gross property asset 

value divided by the percentage share owned. 

3.5.4. Authorised Property Unit Trusts 

In order to be available to retail investors, a property unit trust must be authorised and 

set up to comply with requirements for the constitution, management and operation of 

42


the fund, including investment restrictions, set out in regulations issued by the 

Financial Services Authority. The possibility to get authorised was introduced in 1991, 

and there are currently three authorised property unit trusts (Chartwell Investment 

Management, 2002). 

Authorised property unit trusts permit direct investment in a diverse portfolio of 

properties. Units are created by the manager of the fund, trustees are paid and the units 

are then sold openly. Authorised property unit trusts are exempt from capital gains tax 

on disposals of investments in the fund, with income taxable in the fund at 20%. 

Between 20% and 80% of the asset value of the property unit trusts have to be 

invested in real estate. Gearing is restricted to 10% of the asset value. The portfolio 

weight of one property may not exceed 15% of the asset value and the cash flow that 

is generated from one tenant may not exceed 20% of the total cash flow. 

Authorised property unit trusts can be listed under the latest proposals. They are all 

open-end funds and have predetermined redemption procedures, which differ from 

trust to trust. In addition, there is a developing secondary market that allows the 

transfer of units between investors on a matched bargain basis. Currently, HSBC Bank 

holds a secondary market in property unit trusts. Table 13 below describes the three 

authorised property unit trusts. 

Table 13. Authorised property unit trusts fact sheet. 

Name Aberdeen Property Share Fund 

Minimum investment €820 or €82 per month 

Fund size €92 million 

Investment sectors 89% Real Estate Shares, 1.4% Convertibles, 9.6% Cash 

Investment manager Aberdeen Unit Trust Management 

Name Norwich Union Property Trust Fund 



Investment sectors Directly held property 69.2%, Property related assets 16.7%, 

Cash 14.1% 

Investment manager Morley Fund Management 

Name Edinburgh Property Portfolio Fund 



Investment sectors Directly held property 62.7%, Shares 16.7%, Cash 16.6%, 

Fixed interest 4.0% 

Investment manager Edinburgh Fund Managers 

Source: Aberdeen Unit Trust Managers, Morley Fund Management, Edinburgh Portfolio. 

3.5.5. Unauthorised Property Unit Trusts 

Unauthorised property unit trusts are collective investment vehicles designed to enable 

UK tax-exempt institutions, such as charities and pension funds, to gain the benefits of 

pooling and specialist management without losing their tax-exempt status. Unauthorised 

property unit trusts are currently the closest to offering a truly tax effective property 

43


investment vehicle. There is an exemption from capital gains tax where all issued units 

are held by investors who are themselves wholly exempt from capital gains tax or 

corporate tax. 

The property unit trust is governed by the requirements contained in its constituting 

trust deed, which will set out all requirements for the operations of the trust as well as 

the obligations of the Operator/Manager and Trustee. Property unit trusts are typically 

open-end vehicles. 

In all, there are 40 property unit trusts in existence, which vary in size, composition and 

investment strategy. Most are open-end investment vehicles. Roughly 30 are based 

onshore the UK, with the remaining ten being offshore trusts. The onshore-based 

unauthorised property unit trust market has a current market capitalisation of €18.1 

billion, in comparison to the offshore market with a capitalisation of €5.6 billion (Baum, 

2001). The market for unauthorised property unit trusts corresponds to approximately 

5% of the direct institutional market. Property unit trusts are not listed, and whilst 

secondary trading does exist, liquidity is low. 

The largest PUT is the Schroeder Exempt Property Unit Trust, established in 1971, with 

a property portfolio currently valued in excess of €1 863 million and more than 600 

investors. For all but the smallest charities, units from different trusts can be held to 

give a diversified portfolio. 

The assets of the unauthorised property unit trusts are to each one third attributable to 

the office and retail sectors (HSBC, 2002). 

3.5.6. Managed Property Funds 

Managed funds (life managed property pension funds) are the insurance companies’ 

equivalent of the pension funds’ property unit trust. They are usually, but not always, 

managed by insurance-based fund managers. Insurance managed funds are worth in 

excess of €4.8 billion (Baum, 2001). The performance of eight managed property funds 

may be tracked by the HSBC / APUT Pooled Property Fund Indices, published 

monthly. 

Managed funds are unit-linked funds. Some are sold to retail clients and some are sold 

only to institutional investors. The same fund may have both investor types and charge 

different fees based on the source of capital. 

In return for an investment in a managed fund, a life policy is issued by the life 

company to the pension fund. The life policies are held in the name of the pension fund 

and not by a nominee. Managed funds are accumulation funds: there is no distribution 

of income. As a result, redemption periods can be shorter than for PUTs, as income can 

be used to finance redemption. 

Managed funds are governed by DETR regulations and most are in practice prevented 

from investing in some asset types, including limited partnerships. Managed funds can 

gear, but this is problematic in actuarial terms and none do so in practice. To achieve 

44


secondary market trading, investors have to deal directly with the manager because of 

the life policy assignment. Usually, investors may invest at net asset value plus 5.75% 

and disinvest at net asset value less 1.75%. 

The assets of the managed property funds are to one third attributable to the office 

sector and to 40% to the retail sector (HSBC, 2002). 

Performance 

In the figure below, figure 17, the return on investment from gilts, equities, real estate 

equities, directly owned property and unauthorised property unit trusts are compared. It 

is evident that the returns on property unit trusts are correlated with that of directly 

owned property. The return on property company shares are more correlated with other 

equities than with directly held property. The return on investment in property 

investment trusts is likely to be correlated with the return on real estate equities, but 

property investment trusts may also hold equities in other sectors and on other markets. 

For that reason the correlation may vary between different investment trust depending 

on their asset mix. 

Index, 1980=100 

410 

360 

310 

260 

210 

160 

110 

60 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

Figure 17. Return on investments 1989-2001. 

Source: HSBC/APUT/IPD 

45 

1998 

1999 

2000 

2001 

Gilts 

Equities 


shares 

Real Estate 

PUTs 


The Treasury has recently announced that it will not support the creation of US style 

REITs in the UK. As a result, the future appears to hold much promise for the limited 

partnership and property unit trust, both onshore and offshore, and other non-UK 

structures, according to Baum (2001). 

However, access remains constrained by the structures (for example the restriction on 

the number of limited partners, feeder partnerships notwithstanding) and the minimum 

capital required. None of the new vehicles provide means of commercial property 

investment for smaller private investors except for the authorised property unit trusts.


3.6. Norway 


In a European context, the Norwegian property market has few listed property 

companies. Poor liquidity and low appeal among investors has contributed to 

considerable discounts compared to direct property investments. As the government has 

not approved on any special legislation concerning the set up of property investment 

vehicles, property investors have had to seek other solutions. 

Investments in mutual accounts and in limited partnerships have a long history in 

Norwegian real estate. In the 1980s, syndicating investments became an established 

market, but the downturn of the real estate market in the end of the decade caused a 

drop in the market for syndication. During the last five years, the market for syndicated 

real estate investments has been very strong, but the year 2002 is a year of slow down 

(Catella, 2002). 

As this is a typical OTC-market, there is very little information available. This fact has 

unfortunately had a negative effect on this review of Norwegian property investment 

vehicles. 


Harald Bövre, head of investments at Catella in Norway, estimates that properties with 

a market value of about €1.5 million 9 were sold to syndications between 1999 and the 

first half of 2001 (Malling, 2002). The activity has decreased since, but Bövre thinks 

that the market for property syndication will remain large. 

Property syndications are estimated to total 0.5% of the gross domestic product. The 

property shares on the Oslo stock exchange correspond to 1.1% of the total stock 

exchange capitalisation. Table 14 below describes the level of property securitisation in 

Norway. 

Table 14. Securitisation of real estate in Norway. All data is from 31 December, 2001. 

Asset class Market cap 

€ million 

Property Syndications 

First six months of 2001 

751 

Property shares 105 

Oslo stock exchange 9 297 


Source: Catella, Olso Börse, OECD 

9 The currency rate used is the daily average on 28 December, 2001. 1 NOK = 0,12722 EUR. 

(www.svt.se/nyheter/2001/011231/230.html). 

46


3.6.3. Property Syndications 

A syndication, or syndikeringsselskap, is a property company owned by a group of 

investors. The syndicated investment companies are usually in the form of limited 

partnerships, unlimited general partnerships 10 or private limited liability companies. The 

syndication typically owns one property. 

The property shares are sold on over-the-counter markets. Trading with the property 

shares involves a fee of about 2.0% of the gross value of the property share. This fee is 

usually split between the buyer and seller. When selling a share in a limited partnership 

or unlimited general partnership, the permission of the board and lenders are normally 

required. This takes typically one month. The settlement of a trade of equities in 

syndicated investment companies typically takes two weeks and does not require 

permission from the board. Fearnley Finans (2002) gives an indication of the liquidity 

of the sector, with 17% of the total value of their shares being traded on the secondary 

market or repurchased because of selling of the property. 

The syndicated investment companies are taxed according to their legal form. They do 

not benefit from any special rules of taxation. This also means that there are no 

additional restrictions on them. Common levels of gearing in the companies managed 

by Pareto Private Equity are 80-90%. 

There are about twenty companies organising syndicated property investments. The 

seven largest actors on the market are ABG Sundal Collier, Acta, Den Norske Bank 

markets, Fearnley Finans, Ness, Nordea Securities, Pareto Private Equity and Risan & 

Partners, according to Bövre (e-mail contact, 15 August 2002). 


The syndicated properties are generally Norwegian, centrally located, easily managed 

and let to a solid tenantry with long-term rental agreements (Malling, 2002). The 

dominating sector of syndicated properties is commercial property. However, the 

number of residential properties sold to syndications increased in 2002. This 

development is driven by the increasing price of residential property in Oslo, which 

allow of profitable investments. Of the properties syndicated by Pareto, 50% are multi 

purpose buildings and 32% are office property. 

Investors 

This investment form usually attracts private investors and private investment 

companies. The amount invested range from €6 000 to several hundred thousand. The 

price of shares in syndications organized by Fearnley Finans range from €12 500 to €90 

000 (Fearnley Finans, 2002). 

Performance 

As the shares of the syndicated investment companies are not listed, it is difficult to 

analyse the performance of the investment. Pareto suggests that the net asset value of 

10 

Ansvarlig selskap (Ans) in Norwegian. The stockholders are both jointly and severally liable for what 

the partnership does. 

47


the companies that they manage have increased with 11% annually since 1993 (Pareto 

Private Equity, 2002). 


The tradition of organising syndicated investments both in real estate and in shipping 

lives on in Norway. Before the tax reform of 1999, the investors in limited partnerships 

benefited from favourable rules of taxation, making it possible to transfer depreciations 

from the investment company to the investor. Because the investment companies were 

highly geared, the depreciation was substantial. The large depreciation allowed the 

investor to reduce his taxable income, giving him large tax savings. 

The fact that the market for syndicated property investments has increased in size since 

the tax reform is according to Jarle Villumstad at Aberdeen Property Investors caused 

by the overall benefits of indirect ownership of property (e-mail contact, 16 August 

2002). Catella (2002) explains the current slow down of syndicated investments by the 

higher cost of capital. They expect this segment to recover and remain an important 

source of liquidity for the Norwegian real estate market. 

48


4. Analysis of Investment Vehicles 

4.1. Categorisation of the Investment Vehicles 

The investigated countries offer investors a variety of property investment vehicles. 

Except for Norway, all of them offer tax efficient property investment vehicles under 

government supervision. The British property investment vehicle that may be said to 

be tax efficient, the unauthorised property unit trust, is available to institutional 

investors only. 

In Norway, limited partnerships or equivalent vehicles are used for tax efficient 

indirect property investments. Limited partnerships are also used frequently in the 

United Kingdom and in Germany. In Germany they are called closed-end funds and in 

Norway they take the form of property syndications. This group of investment vehicles 

are from now on referred to as private property vehicles. 

The German participation rights and the Belgian real estate certificates form an 

investment class of their own. Both give the holder a property related risk and return. 

However, the rights of the holders of the real estate certificates and participation rights 

are similar to those of a creditor and not to those of a joint owner. Therefore, they do 

not involve indirect ownership of property in the same sense as shares of the issuing 

property company do. This fact, in combination with the fact that they are neither as 

common nor as liquid as shares in a property investment company or fund in these 

countries, make them less interesting to analyse further. Instead, this chapter will focus 

on the other property investment vehicles mentioned in the previous chapter. 

4.2. Legal Framework 

The countries that have introduced property investment companies have all taken the 

opportunity to regulate their business activity. As the establishment of property 

investment companies involve reduced tax revenues for the government, regulations 

are set up in order for this subsidy to be used for real estate investments only. The 

Belgian government direct the investment activity to residential property, as the 

dividend from SICAFIs that hold at least 60% of their assets in Belgian residential 

property is not subject to withholding tax. The American government allows the 

REITs to invest in mortgages secured by real estate as well, which indirectly benefits 

mostly private investors in residential property. 

As the aim of introducing tax-favoured property investment companies is to promote 

collective investments in real estate, it is important to attract many trade parties. One 

important measure in doing so is to allow the property investment companies to be 

listed on a stock exchange. This way, the risk of the investment is reduced through 

improved information on return and risk, which leads to a more effective market. For 

these reasons, shares in property investment companies in all the investigated countries 

may be listed. The German open-end funds and the Dutch unlisted FBIs achieve the 

same effect by compulsory daily publishing of unit prices. 

49


Other common characteristics in the regulations governing the property investment 

companies are limits on the ownership structure. Generally, these specify which 

investor categories that are allowed to invest in the vehicles and to what extent. This 

aims at pinpointing the investor categories that are to benefit from the favourable rules 

of taxation. The American and Dutch legislation state that the investment companies 

may not be closely held, which is a measure that aims at creating a broad investor base 

and many trade parties. This leads to higher liquidity and more efficient transactions. 

All but the American REITs are also limited by requirements that aim at reducing the 

business risk. The purpose of these measures is of course to prevent speculation and to 

create an investment vehicle with a yield that is correlated to the real estate market. A 

lower level of gearing not only reduces the business risk, but it also makes the return 

more dependant on the development of the real estate market than on the interest rate. 

Restrictions on the composition of the portfolio, i.e. the relative weight of one object in 

the portfolio and the total number of objects, aim at reducing the portfolio risk by 

reducing the effect of the property specific risks of the properties in the portfolio. Until 

July 2002, German open-end funds were prohibited from investing more than 20% of 

their net asset value in non-European counties, a restriction that aimed at reducing the 

risk of the investment and the currency risk. Nowadays, none of the investment 

companies are limited by such legislation and the creation of the European monetary 

union has eliminated the currency risk of investing within the Euro zone. 

The REITs, SICAFIs and the FBIs have to distribute a proportion of their result to the 

shareholders in order to maintain their legal status. In the German open-end funds, no 

such requirement exist, but the net income of the open-end fund is directly attributed to 

the shareholders, regardless of whether it is retained or distributed. The requirement on 

compulsory paying out of profits prevents the companies from growing organically 

and thus creates stability. The annual dividend is attractive to private investors who 

seek an investment with bond like characteristics. The taxation of the dividend is the 

only source of tax revenue for the government from the operations of the property 

investment company. 

The UK limited partnerships or equivalent vehicles such as the Norwegian property 

syndications are not subject to special legislation. The German closed-end funds 

benefit from favourable rules of taxation, as income is taxable in the category of 

income rentals and royalties, but are otherwise not subject to any special rules. 

Table 15 on the next page summarises the legal framework for the investigated 

property investment companies. 

50


Table 15. Summary of the legal framework concerning property investment 

companies and funds. 

Name of vehicle REIT SICAFI FBI 

Country of dominicile USA Belgium 

51 

Open-end 

funds APUT UPUT 

The 

NetherlandsGermany UK UK UK 

Stock exchange listing 

possible Yes Yes Yes No Yes No No 

Pays corporate tax No No No No Yes No No 

Pays capital gains tax No No No No No No No 

Level of gearing limited No 

Compulsory paying-out 

Yes, 50% Yes, 60% Yes, 50% Yes, 10% N/a N/a 

of profits 

Limitations on the 

Yes, 90% Yes, 80% Yes, 100% No No No No 

ownership structure Yes Yes Yes Yes No No No 

Restrictions on the 

composition of assets Yes Yes No Yes Yes No No 

Category of investors All All All All Private Institutional All 

Managed 

Funds 

4.3. Categories of Investors and Market Capitalisation 

As one important reason for introducing tax efficient property investment companies is 

to attract more trade parties to the real estate market, it is interesting to investigate the 

investor categories in the existing vehicles. The portion of individual investors may 

therefore illustrate how well the introduction of property investment companies has 

succeeded in increasing the number of investors in commercial real estate. 

Data from the American REIT market suggest a proportion of individual investors of 

47%. Unfortunately, there is no exact data available on the European property 

investment companies. By analysing the regulations on the shareholder structure, 

indications on the portion of private investors in the investment companies are found. 

The German funds are likely to have the highest fractional share of private investors, 

because the sales activities are aimed at private investors. Furthermore, German 

institutional investors have the option of investing in special funds, which are more 

focused in their choice of investment sectors and therefore attractive to institutional 

investors. 

The SICAFIs have to be listed on a stock exchange. The largest shareholders in the 

SICAFIs hold on average 25% of the shares and the average free float proportion of the 

shares being 59%. This may be compared to the average free float proportion of the 

shares in the Dutch FBIs, which is 75%. It is therefore likely that the proportion of 

shares held by private investors is larger in the FBIs than in the SICAFIs, but it is 

impossible to be more exact than that. 

Another factor that may measure the success of the property investment vehicles is the 

relative size of their market, as this serves as a measurement of the level of property 

securitisation. The largest market capitalisation compared to gross domestic product is


that of the German open-end funds, which correspond to 4.2% of the gross domestic 

product. The FBIs have a market capitalisation corresponding to 3.2% of the Dutch 

gross domestic product. The REITs and the SICAFI comes next, with 1.7% and 0.85% 

respectively. 

When it comes to the private property vehicles, there is unfortunately no data available 

on the average size of the private property vehicles in each country. However, the 

Norwegian property syndications are characterised by investments in only one 

property. The target group of the companies organising property syndications are 

private investors, and the minimum investment is adjusted to suit this investor 

category. The German closed-end funds have minimum investment levels in the same 

range and the investors are also typically private investors. The UK limited 

partnerships on the other hand, are used by private investors as well as insurance 

companies and pension funds. As the average investment is over €80 million, this 

indicates a larger average market capitalisation than that of the German and Norwegian 

private investment vehicles. 

The relative market sizes of the private property vehicles varies between the countries. 

The Norwegian market for syndicated investments correspond to about 0.5% of the 

gross domestic product. The reasons for the use of private property vehicles may be the 

lack of a tax efficient investment vehicle like a property investment company 

combined with a tradition to syndicate investments in property and other large assets. 

Germany also has a tradition of investing in property, which is further enhanced by 

favourable rules of taxation for the closed-end funds. The relative market size of the 

closed-end funds correspond to 0.2% of the gross domestic product. The British 

investment market for private property vehicles is the largest, corresponding to 3.6% of 

the gross domestic product. Characteristic for this investment market is the presence of 

institutional investors, who account for the majority of the invested capital. Table 16 

below summarised the proportion of private investors, the relative and absolute market 

capitalisation of the vehicles and number of vehicles. 

Table 16. Summary of the size of the investment markets and the percentage private 

investors in the investigated private property vehicles, property funds and property 

investment companies. 

Open-end Closed-end Limited Property 

Name of vehicle REIT SICAFI FBI* 

The 

funds funds partnerships syndications 

Country of dominicile 

Market capitalisation 

USA Belgium Netherlands Germany Germany UK Norway 

(€ million) 170 166 1 945 12 022 77 700 4 360 17 500 1 502 

Percentage of GDP 1.7% 0.85% 3.2% 4.2% 0.2% 3.6% 0.5% 

Number of vehicles 

Percentage private 

300 12 8 62 N/a 90 N/a 

investors 47% ~25%


4.4. Investment Strategy 

The investment strategy, i.e. the property sectors and markets of investment, is 

dependant on national legislation as well as the maturity and size of the investment 

market. The size of the investment market influences the liquidity of the sector, which 

in turn affects the level of specialisation possible. Specialisation requires both liquidity 

and a large investment sector capitalisation. Figure 18 below describes the total market 

capitalisation of the investment vehicles and the number of vehicles. 

Market capitalisation (€ million) 

180.000 

160.000 

140.000 

120.000 

100.000 

80.000 

60.000 

40.000 

20.000 

0 

Market Cap. Number of vehicles 

REITs 

SICAFIs 

FBIs 

Open-end funds 

Closed-end funds 

Limited Partnerships 

Property Unit Trusts 

Managed Funds 

Property Syndications 

Figure 18. Number of investment vehicles and total market capitalisation. 

The American REIT industry has a long history, which makes it interesting to study. 

The REITs have the largest average market capitalisation of the investigated vehicles, 

and they are highly specialised in one property sector. Interestingly, retail property is 

the most frequent investment sector, but the REITs specialising in the sectors of 

industrial/office, residential and self storage have a larger average market 


The German open-end funds have existed for slightly more than forty years, just like 

the REITs, and come in second when it comes to average market capitalisation. They 

invest mainly in Germany, but the portion of foreign investments is increasing. The 

funds have a diversifying investment strategy with a preference for the office sector. 

This low risk approach to property investment is due largely to marketing efforts 

promoting property funds as a long-term investment suitable for private pension 

provisions. 

The Dutch FBIs are also well developed. They have existed since 1969, and have 

reached an average market capitalisation of €1 336 million. The market shows signs of 

consolidation, as a number of FBIs have been taken over or been delisted. In their 

choice of investment sectors, they are rather specialised. The dominating property 

sector is retail. There are no restrictions on the markets of investment, and a majority of 

the assets are foreign properties. This is unique on the European market. 

53 

350 

300 

250 

200 

150 

100 

50 

0 

Number of vehicles


The Belgian SICAFIs have the shortest history of the property investment companies 

under consideration. Their average market capitalisation is still rather small. They 

invest mainly in the Belgian office sector, and may be said to have a diversified 

portfolio strategy. 

Regarding the investment strategy of the private property investment vehicles, they are 

generally specialised on one property sector. The small number of properties in each 

vehicle may explain this, but it is also a choice that many of the larger vehicles have 

made. Their decision may be motivated by the specialised management skills available 

and the possibility for the investor to diversify by holding shares in many vehicles. The 

investment sectors of the private investment vehicles are difficult to assess. The 

German closed-end funds mainly invest in a small number of properties and typically 

choose properties with a low property specific risk. The UK limited partnerships have a 

larger average size, and may thus invest in larger properties. This may explain the 

popularity of limited partnerships to invest in shopping centres, as investments in such 

properties require large sums of capital. 

As to the investment market of the private property investment vehicles, it is a feature 

of difference. The German closed-end funds are characterised by a high fractional 

share of foreign investments, whereas the Norwegian property syndications invest 

mainly domestically. There is no information available on the investment sectors of the 

UK limited partnerships. 

4.5. Performance 

The return from the indirect property investment vehicles is interesting to study, as the 

aim is to provide investors with a real estate related return. As stated in the theory 

chapter, property company shares do not yield a genuine real estate related return, as 

they are highly correlated with the development of equities. Furthermore, listed 

property companies may also develop property, a line of business that is driven by 

other factors than the real estate industry. Indirect property investment vehicles, which 

are the scope of this report, may not be said to render a genuine real estate related 

return, as external factors may affect the attractiveness of the investment vehicle, but 

the return is related to the real estate industry. The private property vehicles yield a 

return that is highly correlated with the property sector in which they invest. 

A trend seen in the return on investment in the German open-end funds is a strong 

correlation with government bonds. Notable for the German market is also that the 

open-end funds have outperformed directly held property, although the units are 

bought at net asset value. This may be explained by more modern properties in central 

locations in the portfolios of the open-end funds. The extensive regulations on the 

open-end funds that aim at reducing the business risk pave the way for open-end funds 

as a low risk investment vehicle. 

Just like the open-end funds, the Dutch unlisted FBIs are sold at net asset value. The 

performance of these funds is therefore likely to follow the real estate market closely, 

but unfortunately there is no data available on their performance. The development of 

54


the listed Dutch FBIs is more volatile than directly held property and bonds. The 

annualised return over seven years falls between that of bonds and directly held 

property, with directly held property being the most profitable investment of the three. 

Part of the difference between the stronger performance of directly held property and 

FBIs may be explained by costs of administration and high exposure to foreign 

property, which has shown a weaker development than Dutch property. 

The performance of the SICAFI is strongly influenced by the movements of the 

Brussels stock exchange. The volatility of the SICAFI shares is lower, but the tendency 

is the same. The annualised return over five years shows that the return on investment 

of the SICAFIs falls between that of bonds and equities. Since there is no property 

index in Belgium yet, it is impossible to analyse the correlation with the property 

market. 

The American property market has shown a positive return every year of the past 

decade. The equity REITs have however shown mixed returns, being more volatile 

than the property market. The annualised return of the equity REITs over the past thirty 

years is above that of bonds but less than that of equities. 

4.6. Key Success Factors 

From the view of an investor, an investment in an indirect property investment vehicle 

must have certain characteristics in order to be attractive. Investors generally seek a 

vehicle that is tax efficient and transparent and whose shares are liquid and may be 

traded without high costs of transaction. In addition to this, the shares are to render a 

real estate related return. 

Many of the investigated vehicles meet the requirement on tax efficiency, i.e. are not a 

taxable entity or are exempt from tax on the corporate level. The UK authorised 

property unit trusts do not, however, as they are to pay tax on income. Changing rules 

of taxation make German open-end funds taxable for capital gains, but income remains 

taxable at the investor level. The Belgian SICAFIs are subject to an annual tax on net 

asset value, but it is very low, and the SICAFIs are therefore more or less tax efficient. 

The most favourable rules of taxation are those of the REITs and the FBIs. In addition 

to this, they have a long history and data on their performance is available to investors. 

This makes them easily analysed and thus transparent. 

The REITs and the listed FBIs best meet the demands for liquidity and low costs of 

transaction. Stock exchange listing and large market capitalisation of the vehicles are 

important in creating liquidity. The Belgian SICAFIs have a too low velocity and a 

relatively small market capitalisation to be truly attractive for institutional investors. 

The German open-end funds have good liquidity but rather high costs of transaction. 

Investors in the special funds, who are for institutional investors only, must have the 

permission of the fund manager in order to sell their shares. This limits the liquidity to 

that of the underlying properties. 

The demand for a liquid investment vehicle that also renders a real estate related return 

is difficult to meet. The Dutch unlisted FBIs and the German open-end funds offer a 

55


return that is closely linked to the performance of the real estate market, as the units are 

sold at net asset value. But there are high transaction costs associated with selling the 

units. The REITs and listed FBIs on the other hand, are generally characterised by 

good liquidity and low costs of transaction, but their short-term return is linked to the 

development of the stock exchanges. In the long run however, the return is in line with 

that of the real estate markets. 

A stock exchange listed property investment vehicles that also renders a real estate 

related return is a key issue when evaluating the investigated vehicles. By listing the 

shares, the risk of the investment is reduces by improved information on return and 

risk. This leads to a more effective market, which will attract more investors and 

improve liquidity. However, the price for improved liquidity, low costs of transaction 

and transparency seems to be a performance that is weakly correlated with the return 

on directly held property and discounts to net asset value. Units of the German public 

open-end funds, who are not listed on a stock exchange, are instead sold to the issuer 

at net asset value. This way, the return is real estate related, the liquidity is good, the 

funds are transparent but the costs of transaction are increased. Units are bought at net 

asset value plus five per cent, which is the provision of the bank. In all, this seems to 

be an attractive investment form for private investors. For institutional investors, the 

high costs of transaction are not justifiable as they may use special open-end funds. 

The private property vehicles do not fulfil the demands of an investor on liquidity and 

transparency, but are still used to a large extent. The Norwegian property syndications 

are the only tax efficient indirect property investment vehicle that renders a real estate 

related return available in Norway. The lack of a better alternative is probably the 

reason for their popularity in combination with a tradition of investing in real estate. 

The German closed-end funds also attract mostly private investors. They are mainly 

tax driven, but is also the only alternative available to private investors seeking 

focused property exposure. The British limited partnerships are used mainly by 

institutional investors and property companies. The institutional investors may also 

invest in property unit trusts, but the limited partnerships offer the possibility to 

influence the investment strategy. 

56


5. Conclusion 

Investors generally seek a vehicle that is tax efficient and transparent and whose 

shares are liquid and may be traded without high costs of transaction. In addition to 

this, the shares are to render a real estate related return. Depending on the priorities of 

the investor, the attractiveness of the vehicles varies. Private investors may prefer to 

invest in minority holdings in property investment companies. Property investment 

companies offer greater liquidity, transparency and lower costs of transaction than do 

shares in private property vehicles. Of the property investment companies, the 

American REITs and the Dutch FBIs best meet the demands for liquidity of the 

investment, tax efficiency and low costs of transaction. Their return of investment is 

however less correlated with that of the real estate market than is that of the German 

open-end funds. The open-end funds are however not tax transparent and are 

associated with higher costs of transaction. However, the investment strategies of the 

property investment companies are not decided by majority vote, and investors may 

therefore not influence it. Institutional investors and investors who want to influence 

to investment strategy, may therefore prefer to invest in private property vehicles. 

Interesting matters that need further investigation have been revealed in the process of 

writing this report. One such issue is that of the liquidity of property investments and 

the degree of real estate related return that the investment renders. This study suggest 

that publicly traded shares in property investment companies are more correlated with 

the equities markets than are the returns of less liquid investment vehicles. However, 

in order to draw any conclusion on this, a thorough investigation is required. 

The increasing value of cross-border affairs in Europe and the changing legislation 

give rise to new issues of interest to investors. An investor seeking to structure a pan- 

European property fund is faced with not only the challenge of optimising the 

structure of the vehicle with regard to the investor preferences, but also to the 

investor categories and countries of origin. Furthermore, the taxation of an 

investment vehicle is dependant on its corporate domicile and on the countries of 

investment. A report on this would be of interest to the European property investor 

community and property advisors alike. 

An extended survey that would include additional countries would increase the 

understanding for the actors on the European property markets and the effects of an 

introduction of property investment companies. Countries of interest are for example 

Luxembourg, where a structure called SICAF is used for property investments. The 

SICAFs are tax efficient and publicly traded. Dividends paid by the SICAF are free 

of Luxembourg withholding tax. The SICAFs are therefore often used for crossborder 

investments in Europe. Other European countries with interesting investment 

opportunities are Denmark and Spain, which recently introduced holding company 

structures that could be used for real estate funds. The Spanish holding companies 

may however not hold Spanish assets. Both present new structuring opportunities on 

interesting property markets. 

In a global perspective, it is worth noting that both Turkey and Japan recently set up a 

legislative structure similar to the US REITs (Fickes, 2002). The Japanese structure is 

called J-REITs and there are currently two listed companies on the Tokyo Stock 

57


Exchange (Sasaki, 2002). The development of these investment vehicles and of the 

national property markets would be interesting to follow. Australia and New Zealand 

have hosted REIT-like investment companies for some time already. 

Other countries may follow, as the European business community’s interest in the 

REIT concept has grown. There has been lobbying for the concept of REITs in the 

U.K and it has also been a topic of debate in France. There are attempts to establish a 

corporate structure that operates like REITs in Germany (Fickes, 2002). In Sweden, 

politicians have proposed bills on investment vehicles similar to the U.S. REITs 

during the last three years, but unsuccessfully. In Finland, there is also a bill on 

property investment vehicles submitted to the parliament, and the KTI Property 

Information Ltd in Finland is preparing a report on the theme. Clearly, the property 

market is changing. 

58


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62


Appendix I 

Definitions 

The following definitions of terms from Barron’s Dictionary of Accounting Terms 

are used throughout this report: 

Closed-end investment company 

Firm that, for a management fee, invests the pooled funds of small investors in 

securities appropriate for is stated investment objectives. It offers participants more 

diversification, liquidity, and professional management service than would normally 

be available to them as individuals. Closed-end investment companies have a fixed 

number of outstanding shares that are traded like stock. Unlike an open-end 

management company, which created new shares to meet investor demand, a closed 

end fund has a set number of shares. These are often listed on a stock exchange. 

Closed-end investment companies are also known as an investment trust. 

Limited partnership 

Organisation made up of a general partner, who manages a project, and limited 

partners, who invest money but have limited liability, are not involved in day-to-day 

management, and usually cannot loose more than their capital contribution. Usually 

limited partners receive income, capital gains, and tax benefits; the general partner 

collects fees and a percentage of capital gains and income. Typically, public limited 

partnerships are sold through brokerage firms with limits on the minimum 

investment, whereas private limited partnerships are put together with fewer limited 

partners who invest a larger minimum sum. 

Investment trust 

See closed-end investment company 

Liquidity 

1. Characteristic of a security or commodity with enough units outstanding to 

allow large transactions without a substantial drop in price. 

2. Ability of an individual or company to convert assets into cash or cash 

equivalents without significant loss. Investments in money-market funds and 

listed stocks are much more liquid than investments in real estate, for instance. 

Having a good amount of liquidity means being able to meet maturing 

obligations promptly, earn trade discounts, benefit from a good credit rating, 

and take advantage of market opportunities. 

Market capitalisation 

Value of a corporation as determined by the market price of its issued and 

outstanding common stock. It is calculated by multiplying the number of 

outstanding shares by the current market price of a share. 

Mutual fund 

See open-end investment company 

63


Net asset value (NAV) 

Book value of a company’s different classed of securities, usually stated as net asset 

value per bond, net asset value per share of preferred stock, and net book value per 

common share of common stock. The formula for computing net asset value is total 

assets less any intangible asset less all liabilities and securities having a prior claim, 

divided by the number of units outstanding. 

Open-end investment company 

Firm that, for a management fee, invests the pooled funds of small investors in 

securities appropriate for is stated investment objectives. It offers participants more 

diversification, liquidity, and professional management service than would normally 

be available to them as individuals. The term open-end arises from the fact that the 

firm continually creates new shares on demand. Mutual funds shareholders buy the 

shares at net asset value and can redeem them at any time at the prevailing market 

price, which may be higher or lower than the price at which the investor bought. 

The shareholder’s funds are invested in stocks, bonds, or money market 

instruments, depending on the type of mutual fund company. 

Turnover 

Volume of shares traded as a percentage of total shares listed on an exchange during 

a period, usually either a day or a year. The same ratio is applied to individual 

securities. May also refer to the annual sales volume. 

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