NEW YORK CITY-According to the NAREIT Composite Index, REITs gained 13.5% during the second quarter, while real estate stocks ended June with a year-to-date average total return of 4.9%. San Francisco-based REIT KKR Financial Corp. went public late last month raising approximately $800 million. The specialty finance company invests in residential, corporate, commercial loans and mortgage- and asset-backed securities. KKR Financial was organized in July 2004 and completed an initial private placement of shares common stock the following month. Since raising that initial capital, the company has invested approximately $6.3 billion.
According to Broadgate Consultants, institutional investors will either increase or maintain their investments in publicly traded REITs over the next 18 months, according to an overwhelming majority (90%) of buy side analysts and portfolio managers participating in a survey conducted in June. However, nearly half of the survey respondents said that REITs are not forthcoming with sufficient information to value certain income streams, such as those from joint ventures or partnerships, compared to other business segments.
"The good news is that there appears to be plenty of demand for REIT company shares among sophisticated institutional buyers," says Thomas C. Franco, Broadgate’s CEO. He adds that institutional investors will be looking much more carefully at individual REITs.
The combination of steadily improving fundamentals across all sectors, slow-rising interest rates and a lack of alternatives has real estate still "riding high" on investors' wish lists, according to the newly released PricewaterhouseCoopers second quarter 2005 Korpacz Real Estate Investor Survey. "Pent-up demand for real estate from all-cash buyers, particularly pension funds, is also expected to materialize once rising interest rates begin to push some leveraged buyers to the sidelines. The bottom line is an elongated pricing peak similar to the one that rental rates experienced in the late 1990s,“ notes Peter Korpacz, director, PricewaterhouseCoopers' Global Strategic Real Estate Research Practice.
The next vehicle for the REITs might prove to be the suburban marketplace. According the survey results, as more and more suburban office markets show signs of a turnaround, the crowd of potential investors continues to increase, with REITs, foreign companies, institutions and private individuals all getting into the mix. In the first quarter of 2005 approximately $10 billion of suburban office properties sold, representing an increase of 70% over the same period the year before.
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