Div reforms may help protect REITs in downturn-E&Y

* Restrictions hinder performance in distressed mkts

* Investors to choose stable income or one-off high returns

LONDON, March 10 (Reuters) - Global Real estate investment trusts (REITs) may cope better in times of economic stress if rules to pay out up to 95 percent of profits in dividends are shaken-up to allow greater flexibility, a report said.

In its Global REIT Report 2010: Against All Odds, Ernst & Young (E&Y) said REITs were generally well equipped to offer liquidity in turbulent property markets, but reforms were needed to enable companies to stockpile cash when they most needed to.

"Governments need to take a look at REIT distribution rules because the ability to conserve cash could be critical to the survival of some REIT businesses in the next global financial crisis," said Robert Lehman, head of E&Y's REIT practice.

The tough rule on dividends was not the only contributor to poor performance of Australian and UK REITs in the last three years, E&Y said.

REITs in both countries have recorded negative returns in excess of 20 percent in the period after pushing into riskier ventures such as development and offshore assets in order to boost returns.

"The main reason REIT markets in the UK and Australia have performed poorly in the last few years is that they have moved furthest from the traditional 'passive' REIT model - where REITs purchase existing properties and capture revenue by managing those properties," Lehman said.

ASIAN SUCCESS

Notwithstanding the structural flaws, many global REITs enjoyed a bumper 2009 and are bouncing back faster from the global economic downturn than any other real estate investment.

After hitting a trough exactly one year ago, REIT share prices have rallied hard, enabling many companies to raise billions of dollars in secondary or follow-on share sales to reduce debt and repair their balance sheets.

All global REIT markets, except of Japan, recorded double-digit positive returns for the year. Returns for Japan's REITs grew just 6.7 percent, with Australia's REITs performing slightly better at 10.4 percent.

The largest single REIT market in the world, the United States, saw returns of almost 28 percent.

Singapore and Hong Kong REITs posted 85.6 percent and 64.5 percent returns respectively in 2009. Malaysia recorded returns of 38.6 percent, just ahead of South Korea, which reported 28.4 percent returns.

"Our analysis shows that during the recent global downturn, REITs did what they were intended to do: give investors - albeit at a price - an opportunity to quickly adjust their exposure to real estate by selling REIT stocks," said Howard Roth, global real estate head at Ernst & Young.

"Now, REITs are providing investors with a way to capture the market rebound by adding real estate stocks back into their portfolios," Roth said. (Reporting by Sinead Cruise; Editing by Andrew Macdonald) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)