The Tide of Real Estate Investment Trusts
Litke, Ronald, Journal of Property Management
The wave of real estate investment trusts has arrived, opening up opportunities and presenting new challenges for both property and asset managers.
Equity REITs--essentially mutual funds for a group of properties--have left the broader stock market well behind in their wake, bringing a fresh supply of much-needed capital into a market vacated by traditional lenders.
This year, REIT issues are expected to top $13 billion, up dramatically from the $6.6 billion raised in 1992, according to the National Association of Real Estate Investment Trusts (NAREIT), Washington, D.C. For many in the field, a new industry is taking shape.
"We're in the bottom of the first of a nine-inning game," says Barry Vinocur, editor of Realty Stock Review and a columnist for Barron's. "Even the most optimistic observers of the REIT world could not have imagined that we would be where we are today."
Since the end of 1992, the total capitalization of REITs is up 82.2 percent (all growth in equity REITs), according to NAREIT.
It is the new line-up of equity REITs that generated such tremendous growth and financial power. Formerly privately-held shopping centers and other properties with demonstrated performance became highly attractive investments once they were made public.
Previously, most REITs were involved in lending money and played against the prevailing interest rate. Now, however, the equity REIT has become an investment of choice. Where mortgage REITs were performing in the single digits, equity REITs have been consistently performing in the double digits.
Such performance in a slowly recovering economy--mostly in shopping center REITs--has not gone unnoticed. By early 1994, some analysts say, virtually every major center in America will be securitized. The attendant mainstream media coverage has generated enormous interest in REITs as a vehicle for individual investors, while investment bankers and longtime real estate investors have watched share prices increase as much as 20 percent this year.
Billions of dollars of real estate assets have been recapitalized. Most of the REITs that have been formed over the last 24 months have used the public capital primarily to pay down loans on property and thereby provide a strong balance sheet--a great deal of equity--from which to move forward.
There is some concern on the part of investors, however, that the REIT wave may be cresting--that returns may begin to fall. Many analysts do not share in this concern. They point out that while recent public offerings have required more "talking up" to investors, several niche REITs--by single property type and regional geography--have made a strong debut that continues to fuel the pipeline for more growth.
As the prime rate declines, REITs become an even more attractive investment. Moreover, recent changes in the tax code have removed barriers to lure back institutional investors and investment bankers who were hesitant to return to real estate.
The excitement of such an infusion of capital and cash flow has created a sense of renewal among real estate professionals, most of whom agree that public confidence confirms feelings that the market has turned the corner.
"REITs are going to emerge as the dominant factor in the ownership and finance of real estate," says Robert Frank, managing director of Alex Brown & Sons, Baltimore. "Real estate is a capital-intensive business; access to capital markets is crucial to be effective, and there's no larger market than securities to tap."
Frank believes that while the access to investment funds will certainly grow, REITs can still obtain private funds to finance projects, and are therefore able to pursue several options for capital.
THE CHANGING FACE OF REITS
Though REITs have been operating for 30 years, they mostly laid low during the 1980s. Mortgage REITs were not attractive to investors, especially since many of them were devalued at the beginning of the recession. …