Too Late for REITs?
Q: Why choose REITs over private real estate?
A: We prefer REITs over private real estate for the superior management, higher quality assets and market exposure, transparency, corporate governance, and liquidity they offer investors.
Q: What are your expectations for REITs this year?
A: We expect cash flow and dividend growth to be primary driving forces behind total returns for the REIT sector. Internal growth prospects for REIT companies, including occupancy and rents, should continue to improve against a backdrop of fairly limited new real estate supply. At the same time, REIT companies remain active with external growth initiatives. We anticipate above-average dividend growth for REITs that is supported by cash flow growth, below-average historical dividend payout ratios, and proven access to capital markets.
As 2012 progresses, discussions surrounding real estate development will continue to increase, and companies will need to respond to growing tenant demand for high-quality, well-situated commercial real estate; however, we expect the increased focus on sponsorship by both tenants and lenders will benefit listed REITs over private real estate players who lack the portfolio quality, access to, and cost of capital advantages that listed REITs enjoy.
Q: What are the biggest opportunities and risks facing REITs right now?
A: The greatest upside drivers for listed REITs this year include continuation of the favorable cost of capital trends, an expanding U.S. economy with improved job growth and increased absorption of high quality commercial real estate, and 20-year lows of new, competitive real estate supply.
The biggest downside risks would include a reversal of the favorable cost of capital trends, which we do not anticipate, and potential pressure on lower quality commercial real estate values as loan expirations on collateralized mortgage-backed securities and bank loans increase should the current strong bid in the asset market for properties subside. In addition, if currently favorable fund flows to the listed real estate sector were to reverse, outflows to other areas of the market could become a downside risk.
Finally, from a macroeconomic perspective, the biggest risks for REITs would be if the European debt situation were to worsen; China experienced a hard economic landing; and if U.S. political and fiscal concerns were to escalate.