Leaders in the global commercial mortgage market are positioning themselves for what is widely anticipated to be a burst of capital markets activity over the next few years. REIT regimes are to be introduced shortly in the U.K. and Germany, Europe's two largest property markets, just as a number of markets in the Asia-Pacific region are taking off.
The growth rates during the ensuing few years could resemble those witnessed in the U.S., where real estate listings shot up to $330 billion by the end of 2005, from practically nil in the early 1990s, according to NAREIT, a trade group.
The U.K.'s REIT legislation takes effect at the beginning of 2007, and Germany's is likely to be implemented sometime during the second half of next year. Those two markets alone could introduce more than $100 billion of new capital over the next five years, Standard & Poor's estimates. That would roughly equal the existing 100 billion of free-float market capitalization of all of Europe's listed real estate companies.
Meanwhile, Hong Kong's recently established REIT market is taking off, and Japan is very active as well. Emerging markets such as Singapore and India are expanding rapidly, and China's potential is massive.
"Here in Europe, the game is in the very early innings," said a real estate banker at one of the largest players in the market. "We're still in batting practice for a market such as China."
To cover the budding commercial real estate sector properly, banks need to deliver advisory services, balance sheet and capital-raising capabilities.
Under the guidance of Jackson Hsieh, global head of real estate, UBS is one of the big mortgage shops reshaping its group for the approaching wave of activity.
Alex Rubin, currently a managing director in the Americas real estate investment banking team, is moving to London to assume the role of co-head of EMEA real estate coverage alongside Lionel Botbol.
Rubin, who spent 13 years at Merrill Lynch before joining UBS in 2004, played a central role in the growth of the U.S. REIT market and is charged with doing the same in the UK. Rubin will partner with Tim Guest, UBS's chairman of U.K. real estate. Botbol will continue to focus on the European continent.
With Germany also preparing to introduce a REIT regime, Wolfgang Fuchs, currently a corporate coverage officer in the country, is joining the EMEA real estate investment banking team as head of the German real estate group. He will be based in Frankfurt, and report to Hermann Prelle as well as Botbol and Rubin.
UBS certainly is not the only bank eyeing the opportunity in the U.K. and Germany, where large-cap property companies are expected to convert to REITs and owners of privately held real estate companies are likely to convert and go public.
Conversions and initial public listings are only the beginning when it comes to the banking business these new regulatory regimes will generate. To qualify for REIT status, companies must distribute at least 90% of their taxable income to shareholders. Required to retain less cash, they will have to shift their funding models. "As a result, the level of equity issuance will increase dramatically," the real estate banker said.
As investors differentiate between management teams, some REITs will perform substantially better than others. "That, over time, will create a market of the haves and have nots, as we have seen in the U.S.," said the banker. "That in and of itself leads to consolidation."
Other changes at UBS
UBS also named three new heads of real estate investment banking in Asia - Sonny Badiga, Mark Ebbinghaus, and Daniel Scamps - following a number of recent departures in the region. Badiga was recently a member of the Americas financial institutions group focusing on specialty finance, while Ebbinghaus was an Australian real estate equity analyst. Scamps will continue to be based in Hong Kong, and focus on local property companies. The trio reports to Hsieh and Robert Rankin, head of investment banking for Asia-Pacific.
UBS recently appointed Wilson Lee head of European real estate finance and James Reichek head of U.S. real estate finance.
The bank also hired John Case, who spent 14 years in Merrill Lynch's real estate investment banking group before jumping to Banc of America two years ago. Case and John Brady, another Merrill veteran, are taking over as co-heads of real estate investment banking coverage for the Americas, reporting to Jackson.
Doug Lee and Mitch Sikora were named co-heads of the global real estate private equity fund-raising effort, reporting to Hsieh, Brady and Case.
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