Published: November 2016Contents
i) What are the hot topics?
Publicly traded real estate companies and real estate investments trusts (REITs), with help from real estate private equity, have transformed the global real estate markets over the past 20 years. Their principal innovation, and secret sauce, is ‘liquid real estate’. Unlike traditional property ownership, equity in publicly traded real estate vehicles is highly liquid and can be bought and sold in large volumes, literally in minutes, on numerous global exchanges. More than US$1.5 trillion of properties globally – including about US$1.1 trillion in the United States and US$150 to 200 billion in Europe and Asia each – are now in liquid solution, owned by publicly traded vehicles. Yet, despite the massive growth, the potential future growth is far larger, both in long-standing REIT markets and in newer REIT jurisdictions where the trend is more nascent. With increasing development and urbanisation, the world is producing more and more institutional-grade properties, and a growing percentage of this expanding pool – an estimated US$5 trillion, and counting, so far – will inevitably seek the advantages of liquidity by migrating to the publicly traded markets. The growth is expected to be both local and cross-border, with more than 40 countries already boasting REIT regimes.
ii) Tell us about any key legal developments – recent or pending – and their international impact.
Recent developments include innovative structures to enable REITs to acquire an increasing share of corporate real estate, through REIT spin-offs, sale-leasebacks, rights offerings and joint ventures. Considerable work has also gone into expanding REITs’ footprints into new jurisdictions through the adoption of new REIT regimes and tax structuring, and into new property types, particularly technology-related properties like cell towers, data centres and sophisticated warehouse distribution centres.
iii) What are the biggest opportunities and challenges for practitioners and clients?
The opportunity and the challenge lie in mastering the multiple disciplines that are essential in the REIT M&A field: real estate, corporate M&A, tax and securities. Major real estate transactions have migrated from ‘Main Street’ to ‘Wall Street’. They now often take the form of mergers, acquisitions, takeovers, spin-offs and other corporate transactions conducted in the public markets for both equity and debt. They have grown exponentially in complexity and sophistication, and increasingly represent cross-border multinational transactions fuelled by the now global real estate capital markets and M&A deal professionals. And they are often intermediated by international investment banks rather than local brokers, financed with unsecured bonds or commercial mortgage-backed securities. The process of liquefying real estate, and the transactions that produce it, requires a melding of the legal principles, deal structures, cultures and financial models of traditional real estate, public company M&A and private equity.