Since the onset of the global financial crisis following an exceptional four-year run, real estate investment trusts (REITs) globally have been unsettled by the US Federal Reserve chairman Ben Bernanke’s recent musings on rolling back quantitative easing (QE).
Consequently, REIT prices have retreated about 10 per cent. The elephant in the room can no longer be ignored, the market has been forced to confront the issue: what happens to yield-oriented sectors when interest rates stop falling and money printing slows?
Against this backdrop, last week Resolution Capital met US REITs in Chicago at the 2013 NAREIT convention to discuss the real estate environment.
Presentations highlighted that most sectors continue to enjoy solid leasing, delivering annual rent growth above inflation, typically 2 per cent to 4 per cent. On the capital management front, debt costs have increased 25-50 basis points but remain near historic lows, US REITs able to secure covenant light 10-year debt at all-in costs of about
3.5 per cent. Low dividend payout ratios, moderate gearing and existing long duration debt means US REITs will not be overly stressed by the recent, relatively modest, changes in finance markets.
As institutional investors shift away from bonds, and the property income yield versus bonds spread remains attractive, REIT management still expects to see solid buyer interest for commercial real estate. This affords REITs the opportunity to sell lower-grade property and recycle capital. Several observed it is a sellers’ market.
A key NAREIT message is that conditions are encouraging REITs to rekindle long-dormant development programs. Bottom line: it is better to build than buy.
It signifies property prices are moving above replacement cost. Early movers should make strong development returns but of course their success will attract less sagacious players. Lack of capital to private operators remains a significant hurdle. The key is the strength of the economic recovery and tenant demand.
Hence, we are entering a new and arguably more challenging part of the property operating and investment cycle. Management skill and discipline will be tested.
The market always challenges. It pays to be selective.
Andrew Parsons is the managing director of Resolution Capital.
The original release of this article first appeared on the website of Hangzhou Night Net.