Global REIT values to grow in 2010-Ernst & Young

* Global REIT market cap rebounds to $568 bln

* IPOs, M&A to push values in 2010

* Jobs, economy remain a question mark

NEW YORK, March 10 (Reuters) - The global market value of publicly-traded real estate investment trusts (REITs) is set to expand again this year after rebounding in 2009, an annual report by Ernst & Young predicted on Wednesday.

The recovery in values, after three tough years for most developed REIT markets, will be fueled by renewed interest in initial public offerings and potentially more merger and acquisitions activity. Many large REITs have built up considerable war chests, Ernst & Young said.

"We're seeing a lot of potential IPO activity, where REITs can be an exit strategy for over-leveraged owners," said Howard Roth, Ernst & Young's Global & Americas Real Estate Leader.

Coming IPOs could be in the $500 million to $1 billion range, Roth said. "We at Ernst and Young are working on several around the country."

The global audit, tax and deal advisor said REITs are an ideal vehicle to recapitalize a struggling commercial real estate sector, which continues to suffer from excess leverage and approaching debt maturities, while facing falling rents and rising vacancies amid weak economies and high unemployment.

CONTINUING REBOUND

The global market capitalization of REITs almost halved from mid-2007, when it stood at $829 billion, to $430 billion in mid-2009, before rebounding to about $568 billion at the end of last year. That total is set to grow in 2010, barring a double-dip recession or unexpected credit tightening.

The forecast, which did not project a 2010 rate of growth, comes after a tough few years for global REITs, according to the report, which shows total rates of return over the past three years down by a quarter in the United Kingdom and Australia, down 19 percent in Japan and down 14 percent in the United States.

South Korea, Malaysia, Hong Kong and South Africa show positive three-year rates of return, because REITs in these markets were more focused on core businesses, risked less on acquisitions and development and avoided excess leverage, Ernst & Young said.

Performance lagged in countries where investment trusts took on a lot of debt, developed a lot of new property or expanded into offshore activity, said the Global REIT report 2010, which covers the 16 biggest markets.

Last year marked a recovery, with total rates of return up by double digits in every country except Japan, and up about 28 percent in the United States. Returns were strongest last year in Turkey -- up 151 percent -- and in Singapore, up 85 percent.

REITs provide a tax structure that exempts companies earning most of their revenue from either rent or mortgages from paying taxes on their taxable income if the company distributes 90 percent of it to shareholders.

The total number of REITs dropped to 427 in 2009 from 484 in 2006, according to the report. About a third are U.S.-based, and the United States accounts for about half of world market cap, followed by Australia and France.

About 40 countries have REIT legislation and more may soon adopt the model, including China and the Philippines, Roth said.

MORE M&A?

Other factors likely to push up REIT values this year include the potential for increased merger activity, as companies such as Simon Property Group (SPG.N) and Vornado Realty (VNO.N) built up significant war chests once stock and debt markets stabilized.

Simon was the first to tap the stock market, and once they cleared the path, many other players were able to raise debt and equity, Roth said. But access to financing for deals may still curtail dealmaking among REITs, and questions remain over the sustainability of an economic recovery.

The erosion of jobs has slowed, and the unemployment rate has stabilized below 10 percent, but the possibility of a double-dip recession cannot yet be ruled out, Roth said.

Still, supporting the prospect for more deals is that overseas players, attracted by deep discounts on U.S. property, are emerging as a bigger force, according to the report.

"We see a pretty significant amount of interest by foreign capital into US real estate -- not necessarily foreign REITs, but private equity, sovereign wealth funds," Roth said. "There is a general belief that after the significant decline in values that now is the time if you have capital to (chase) risk-adjusted returns." (Reporting by Nick Zieminski; Editing by Tim Dobbyn)