Magazine article Journal of Property Management

Securitization Shuffle

Magazine article Journal of Property Management

Securitization Shuffle

Article excerpt

If opportunity exists in adversity, today's real estate investment market presents some potential bonanzas.

Inconsistent performance of real estate securities during 1995 has created a lively discussion among those on Wall Street on the availability of capital for real estate projects and the viability of that investment. Most analysts say those seeking capital must appeal directly to investors because the competition for a seemingly smaller pool of money interested in real estate - and the pressure for a strong return - will only become more intense.

Initial public offerings of real estate investment trusts (REITs) will continue to remain few and far between, with the occasional exceptions in the real estate investment trust "growth markets" of self-storage and hotels, says John Haahr, managing director of Everen Securities Real Estate Group in Chicago.

"We'll continue to see good secondary offerings from the top one-third of the market into 1996, with the middle third waiting [to attempt offering] for the market to come back," he says. As for the bottom third, look for more consolidation through acquisitions or mergers, says Haahr and others.

In the market for commercial mortgage-backed securities, where new issue volume fell by 34 percent in the first half of 1995 compared with the first six months of 1994, new issues are expected to bounce back somewhat in this year's second half, predicts Gregory White, managing director of Schroder Mortgage Associates.


The National Association of Real Estate Investment Trusts' (NAREIT) total return indexes paint a grim picture for the industry during the first half of 1995. While the S&P 500 index soared 20.2 percent in the first six months of the year, the NAREIT index for all REITs posted just a 7.8 percent total return.

The comparisons are even worse for the 12 months ended June 30. The NAREIT all index limped along with a 4.8 percent gain while the S&P 500 scored a 26.1 percent gain. "REITs clearly haven't participated in the bull market of the past 18 months," says Mark Decker, NAREIT executive director.

Decker cites industry "growing pains" as part of the problem. He points out that the market capitalization of the REIT market has skyrocketed from $9 billion in 1991 to $50 billion today. "We've outgrown our traditional investor base," he says.

Public investors, who are needed to soak up the huge number of REIT shares outstanding, may also be scared away by the "less than stellar" image of the industry. "There are still concerns about real estate limited partnerships left over from the early 1990s and the savings and loan crisis that are still affecting us," Decker says.

As for the institutional money that poured into the more than 140 initial REIT offerings of the past few years and helped support prices, Decker believes that "a lot of that was short-term, yield-seeking money, mutual funds that were looking at CDs and T-bills, and then saying, 'We can get an 8 to 9 percent yield from a REIT.'" Of course, as soon as CD and T-bill yields started climbing with last year's rising interest rates, this "non-dedicated" money shifted out of REITs and into these other instruments, Decker notes.

But even Decker will admit that the industry is at least partly responsible for its own fate. "Some new issues were mispriced. Maybe some issuers and investment bankers got too greedy," he allows. There is general agreement that when the resurgence of REIT investment trickled down to individual investors and became a hot item in the financial media, there was a rush to market that has since created an adjustment.

Other experts are simply more blunt. "Wall Street has the uncanny ability to meet marginal demand with excess supply," says Samuel Hillers, a REIT analyst with Alex. Brown & Sons in Baltimore.

The REIT industry is suffering from reverse momentum, says Hillers. People who bought the last deals that came to market in 1994 did not make money in most cases, so they do not have any interest in throwing good money after bad in 1995, he says. …

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