REIT Recovery Continues around the World but Raising Capital Still a Tough Challenge
Real Estate Investment Trusts (REITs) around the world continue to show signs of recovery but still face some severe challenges, especially in raising fresh capital, according to Ernst & Young's Global perspectives: 2012 REIT report.
“Globally, REIT markets made solid gains in the latter half of 2011, and first quarter 2012 data confirms this trend. But continued growth into 2013, for many, depends heavily on key aspects of their regional economies as well as the overall global outlook,” says Robert Lehman, Ernst & Young's Global REIT Practice Leader.
Of the six REIT jurisdictions examined in this year's report, Singapore had the best return performance in 2011. The one year rate of return for Singapore REITs (S-REITs) exceeded 21.8%, a performance which put the country's US$30 billion REIT sector ahead of Japan (17.4%), Australia (15.6%), the US (15.3%), the UK (14.8%) and France (11.85%).
IPO activity across all sectors of the global economy was hit hard by the downturn, as Ernst & Young reported earlier this year in its Global IPO update. There was a 40% decrease in global IPO activity in 2011 and this trend continued into 2012. Ernst & Young's 2012 Global Perspectives: 2012 REIT report on REITs says that during the first quarter of 2012 the only country outside the US in which REITs had the ability to raise equity through secondary offerings was Japan.
REIT investments picking up
The global financial crisis also had a severe and lengthy impact on liquidity in the REIT market but the prevailing trend is clearly upward. Globally, investment volumes were up 31% in 2010. Yet, according to Ernst & Young's report, the challenge remains for REIT teams to drive future growth through astute acquisitions, careful asset management and well-timed dispositions — all within an appropriate capital structure. “Coming out of a period of recessionary pressure, the big challenge for REITs is how to grow again,” says Lehman. “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.”
Office and retail properties were overwhelmingly the choice of REITs examined in the report in 2011. Australian REITs' (A-REITs) investment in office and industrial properties fell sharply as they shifted emphasis into the retail sector, investing three times as much (US$226 million) in retail properties as they did in 2010. In the UK, REITs' investments in the retail sector more than doubled from 2010 — the US$3.1 billion they invested was more than they invested in the other commercial property sectors combined. In France and Singapore, REITs' roughly doubled their investment in office properties in 2011 and in Japan, J-REITs invested $US5.3 billion in the office sector, double the rate they invested in apartments.
One trend Ernst & Young expects to see deepen in the coming year — at least in the US market but perhaps also wider afield — is the creation of more non-traditional REITs. “The successful growth of the REIT sector 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,” he adds.
Some of the business sectors that have seen or are considering REIT formation include data centers, document storage facilities, and cell towers. Other areas being considered include telecommunication cell towers.
Among the country highlights detailed in the report:
REIT management teams are focused on attracting investors by enhancing returns following a two-year period of strengthening balance sheets by restructuring debt and selling assets, especially assets held offshore in the US and UK.
French REIT stocks, buoyed by strong earnings, rebounded in the first quarter of 2012 following steep declines in 2011. But the country's REITs are still trading at significant discounts to Net Asset Value (NAV) and this has put a squeeze on their ability to raise new equity. They are able to access relatively low cost debt, however, and foreign investors are increasingly interested in the French REIT market.
Japan's REITs were dealt a double blow from the global recession and stock market volatility following the March 2011 earthquake. More than a year later, the sector has recovered dramatically to the point that IPOs are again taking place. The direct challenge for J-REITs is developing suitable long-term growth strategies such as property diversification. Many of the country's REITs are focused purely on office markets.
Singapore's relatively young REIT market continues to evolve. Hit hard by the global downturn, the outlook for the next year looks relatively good, assuming there are no further setbacks in the global economy. With little opportunity to grow through acquisitions currently, S-REITs are focused on more efficient management of existing assets.
The UK government is committed to growing the REIT sector, especially in the residential property market, and has relaxed several key measures relating to REITs to encourage that growth. The sovereign debt crisis in Europe put a dampener on some of those plans, but it is hoped that continued recovery in the sector will eventually lead to more growth. A potential barrier, however, is the fear that UK REITs are susceptible to takeover by private investors due to their trading at steep discounts to NAV.
The US REIT market has recovered from its partial collapse in 2008, outpacing returns in the S&P 500 by 6% in 2011. A third of the US REIT market increased their dividends last year. Nevertheless, new REIT formation has been slow and the recovery within US real estate markets uneven. One area of growth has been in the non-traded (unlisted) REIT sector and — despite challenges in that sector relating to fee structures, transparency and valuation — further growth could be on the horizon and there is the potential for some larger non-traded REITs to list.
To download the complete report or to access sections relating to these countries specifically, visit www.ey.com/us/realestate.
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