In an election year, the REITs had a simple message for the more then 1,000 investors gathered at NAREIT’s REIT Investor Week in Chicago: Vote for us.
That message was driven home by NAREIT's leadership, including association president, Debra Cafaro (who is also president and CEO of Chicago-based Ventas) and association CEO Steven A. Wechsler. It was also seconded by industry icon Sam Zell, chairman of Chicago-based Equity Residential.
During the “Magnificent Milestone—A Look Ahead” panel, Wechsler highlighted REITs' liquidity, transparency, simplicity, and low leverage levels. But the association also came armed with stats and a target—private equity real estate funds. It measured the performance of REITs versus three different types of private equity funds—core, value-added, and opportunity—from peak to peak (basically over the past 18 years).
Not surprisingly, the result favored REITs. From peak to peak, the study said REITs outperformed core funds by about 7.7 percent per year; outperformed value-added funds by about 8.6 percent per year; and outperformed opportunity funds by 12.1 percent per year.
“Opportunity funds couldn’t match REIT performance,” Cafaro said.
Despite that performance, Carafaro thinks REITs are woefully underrepresented. An IREI/Kingsley Associates Survey said that REITs are slated to receive about 3.4 percent of the $34 billion of new CRE investment planned for 2010. In contrast, 36 percent of that investment will go to private equity core funds, 20 percent is slated for private equity opportunity funds, and 6 percent for private equity value-added funds.
“We have yet to make much penetration into the institutional investor community,” said Mike Kirby (speaking broadly about the REIT universe), chairman and director of research for Newport Beach, Calif.-based Green Street Advisors in that same panel.
Zell thinks the low representation for REITs is primarily a result of advisors funneling institutional money toward private funds and, of course, the volatility inherent with stocks. “A lot of people work in direct real estate investment,” he said. “They need to stay in business.”
But Zell thinks there’s a lot of room for growth because the REIT market is only about 17 years—basically in its infancy. It has grown from about $2 billion in 1992 to $500 billion today. “Allocations will continue to grow as the REIT market expands,” he said.
One drawback, he said, is the number of small REITs out in the market. He thinks they have to deal with the burdens of the private market without getting the same access to capital as the bigger REITs. And, the opportunities for REITs to grow by swallowing those REITs or private companies never materialized as prices spiked in the 2000s.
“In the last six or seven years, the consolidation opportunities were not necessarily justified,” he said.
They may be again in the future though with REITs possibly being positioned to scoop up any troubled assets that come to market. Cafaro said that’s because public companies have already took dilution if necessary while privates are still fighting with their banks. As fundamentals improve, Zell expects the banks to become more active.
“We are seeing measurably more stuff come out of the banks,” Zell said.
And that could present REITs with the opportunity they’ve been waiting for.