Transaction activity in the public markets driven by stock issuance and an easing Fed should bleed down into the private sector, creating some tailwinds for real estate, according to Colliers Securities COO Jeff Jacobson. The public markets are often viewed as an indicator of price movement for private real estate.
The public markets are valuing REITs at a 5% discount to net asset value, with wide variance from sector to sector, said Jacobson.
“As investors position themselves to defensive sectors, healthcare and self-storage are trading at 20% and 15% premiums to NAV, respectively,” said Jacobson. “Office REITs are at the steepest discount, nearly 20%. Excluding office from the REIT index, the overall sector is trading at par with NAV.”
REITs are likely to become more active in the acquisition market as they can issue equity and buy assets on an accretive basis. Many REITs will also issue additional debt on a leverage-neutral basis to grow their portfolio, Jacbson said. Over-leveraged REITs might reduce their debt with proceeds from an equity offering, but buybacks are unlikely.
As a CRE debt wall looms, REITs may be able to refinance more easily than other borrowers. They typically have lines of credit that they can use to bridge to more permanent financing through debt or equity, said Jacobson. In general, REITs have spread out their debt maturity schedules and do not have a significant amount of debt maturing in the next three years. Maturities encompass about 7% of total enterprise value among REITs, he said. Office REITs, however, are at 23% over the next three years and will face the most challenges with refinancing debt.
The office sector is trading at bargain prices, but investors remain hesitant about investing. Industrial is screening attractively, down 2%, while the REIT sector is up 11% year to date, said Jacobson. The REIT sector is set to overperform next year with new development being absorbed and minimal new construction leading to improving fundamentals.
“Generally, I do not foresee a wave of take-outs or consolidations,” said Jacobson. “However, for REITs trading at substantial discounts with desirable assets, we could experience some take-out bids. Additionally, as valuations improve across the REIT landscape, we should see a pick-up in IPO activity.”
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