Investors Buy Real Estate Firms to Beat Poor Returns on CDs Cash-Rich Real Estate Investment Trusts Take on a Larger Share of Property Financing
David C. Walters, writer of The Christian Science Monitor, The Christian Science Monitor
WHETHER real estate markets are up or down, the buyer with cash can almost always call the shots. Today real estate investment trusts (REITs) have the cash.
In a recession-pummeled, debt-loaded real estate market, these publicly traded real estate companies are finding wide-open investment opportunities to add to their portfolios of properties.
"The REIT market is going to be very active in 1993," says Stanley Perla, a partner with the accounting firm Ernst & Young in New York. REITs are producing "an initial return somewhere between 7.5 and 9 percent, depending on the type of REIT and the management and operating history.... Compare that to a 3 percent certificate of deposit."
From $9.5 billion in 1985, REITs have grown into a $50 billion industry today.
"We easily have the ability to grow five times our current size," says Mark Decker, president of the National Association of Real Estate Investment Trusts in Washington. Big returns forecast
"The larger REITs with consistent records of cash flow and dividend growth have had access to the equity markets," says Elaine Derso, an analyst with Prudential Securities Inc. in New York. They have been taking "the cash and doing spread investing - going after the properties that are in the hands of the foreclosure portfolios of banks, the Resolution Trust Corporation, limited partnerships that need to raise money - and buying at yields that are in the 9, 10, and very often 11 percent range."
Kemper Securities Inc. predicts that through 1994 and into '95, some equity REITs should produce total returns (dividends and capital gains) of 15 to 20 percent per year.
In 1992, $6.45 billion in capital was raised by REITs through initial public offerings and secondary offerings. "We're seeing the evolution of a much more stable real estate capital-formation market," Mr. Decker says.
As one of the few ongoing sources of financing in real estate today, "strong REITs are raising capital at comparatively low cost, building their portfolios, and growing their cash flow," Decker says. "This is an excellent environment for buying real estate."
"A hot area has been REITs that invest in apartment houses," says Prudential's Derso. "There has been very little construction since the tax reform act of 1986."
For investors in multifamily housing, "this is not a bad time to be acquiring well situated apartment units," says Hugh Kelly, an analyst for Landauer Real Estate Counselors. "A lot of these assets could be subject to significant appreciation."
A large part of capital formation for real estate before 1986 was driven by the demand for tax shelters. The 1986 tax laws shifted the motivation away from writeoffs toward investing for income and growth. …