Market Trends of Europe REIT Industry
United Kingdom as the Leader of REIT market in Europe
REITs were introduced in the UK in 2007, when nine companies were elected to become REITs. As of June 2022, the number of REITs in the UK has risen to 53 with an overall sector market capital of USD 83.5 billion, based on the data published by the European Public Real Estate Association (EPRA). The market capital of the UK REITs surged by 87.1% from 2020 to 2021, which further declined by 30.5% in 2022, mainly owing to the unstable financial scenario and recessionary trends caused by the energy crisis and other financial headwinds, structural disruptions post COVID-19.
REITs have become one of the leading property investments options. REITs in the UK are exempt from corporation tax for income from property rental business in the country's jurisdiction. However, 90% of the income (tax-exempted) must be typically distributed within 12 months of the end of the accounting period. The residual business income or the non-rental business income was taxable at 19% which has now increased to 25% in April 2023. Although the UK based REITs are not suitable for non-UK property investments, the removal of such barriers can make the UK REIT sector more attractive for investors. The REITs and listed property companies in the country are striving to encourage investments from small investors and wealth managers to boost the growth of the market in the near future.
Being the largest REIT market in Europe, the UK REIT market largely influences the growth of the European REIT market.
Growth of Commercial Real Estate Investment on REITs in Europe
The European real estate market has been witnessing a dramatic downturn in the real estate transactions since 2021 owing to the financial impact of the COVID-19 pandemic and the Russia-Ukraine war in 2022. This has surged the interest rates against property transactions to counteract the inflation. According to the data published by MSCI Real Assets, the European commercial real estate investment in the first quarter of 2023 declined to its lowest rate in the last 11 years.
Although the macroeconomic outlook for the real estate sector is likely to remain unstable in 2023, the REITs are expected to rebound in the second half of 2023. Residential real estate has maintained more income stability than the commercial counterpart. In addition, the growing integration of new themes such as environment, sustainability, and governance (ESG) along with the perceived and recorded increased retail participation post COVID scenario can help REITs in Europe to gain more attraction by creating a social impact along with financial gains. Additionally, investments in sectors with shorter lease durations have been more prone to rent resets, thus affecting the REIT capital gains, however, longer inflation-linked rental contracts provide strong resilience to recessions thus offering a steady income source with high growth potential during the uncertain periods.
With such strategies in place, the European REITs are likely to attract more retail investors by offering affordable and diversified investment opportunities than the real property market, making the European REIT market more lucrative.
