NEW YORK CITY-As REITs continue to fight headwinds, make new acquisitions and recycle assets, the sector is still facing challenges—especially in terms of raising capital, as outlined in a new report by Ernst & Young LLP.
The study, entitled 2012 Global Perspectives, says that the only country outside the US in which REITs had the ability to raise equity through secondary offerings was Japan during Q1. The report also found that IPOs were wholly an American REIT phenomenon, with US REIT formation accounting for 75% of the $2.4 billion in IPO activity in six markets, including Australia, France, Japan, Singapore, UK and US.
The US – which remains the largest of the six markets – had a total market capitalization of approximately $632 billion, followed by Australia, with a total cap of $81 billion. On the return front, the US clocked in at 10.6%, ahead of the Aussies at 8.1% but behind Japan at 20.4%. However, the US dominated the five other markets over a three-year return period at 61%, more than double posted by the next best market, Singapore at 28%.
Robert Lehman, global and Americas leader of Ernst & Young’s REIT practice, says while the REIT markets globally are clearly better positioned than they were just two years ago, the US market remains the most favored for investors, largely because of the sector’s “strong total return data” and because “shares in US REITs continue to command a premium to net asset value.”
The report found that investments by US REITs in new properties slumped to $4 billion in 2009 versus $32.1 billion just two years earlier but, by last year, investment activity had almost returned to pre-recession levels with $31.5 billion in acquisitions taking place. Globally, investment volumes were up 31% in 2010.
The challenge ahead, according to E&Y, is driving future growth through acquisitions, asset management and well-timed dispositions. “Coming out of a period of recessionary pressure, the big challenge for REITs is how to grow again,” says Lehman, in the report. “Many will focus on internal growth – finding ways to operate more efficiently, cutting costs and improving property fundamentals – but one trend we do expect to see more of is for REITs to limit risk when acquiring assets by forming joint ventures with other REITs or even institutional partners, especially where very large portfolio acquisitions are concerned.”
To come? Except a raise in non-traditional REITs, particularly in the US as the industry diversifies. “The successful growth of the REIT sector in the US over the last ten years and its weathering of the downturn has shone a light on the REIT model,” Lehman says. “We are seeing growing interest among a broad universe of corporate owners who are taking a serious look at taking their non core real estate assets and creating a REIT structure to own and manage those assets.”
[To access the full report, click here.]
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