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FYI: The strong first half of the year for real estate investment trusts has started to raise questions about how well the category can perform if interest rates start to rise. But industry pros are calling such analysis short-sighted and wrong. Regards, Ted http://www.investmentnews.com/article/20140708/FREE/140709937?template=printart
Conventional wisdom says that REITs will have an operational handicap if rates start to rise. Since they are required to distribute 90% of their taxable income to investors, they are cash poor and dependent on financing for growth. Low rates are currently an operational asset for REITs, and rising rates could be a significant handicap.
Conventional wisdom also says that REIT equity prices have been inflated by the public's search for yield. With bond rates low-low, shares in REITs have been priced up beyond what their risk-reward would otherwise support.
IMO the "industry pros" are typically biased in favor of a rosy forecast. This is the same phenomena as the sales driven buy-sell asymmetry ... way more issue buy recs than sell recs.
Indeed, this article is not claiming that these CW concerns are not valid - but instead that the market space for the REITs is currently so lucrative that these effects will be offset by demand, and the net outcome will be positive.
But do REITs operate in a vacuum? I would imaging that there must be privately held RE holding companies that are well capitalized without constant borrowing ... or that there must be publicly held RE holding companies that are not organized as a REIT, that can invest profits in new ventures rather than distributing them. Anyone know about this?
"or that there must be publicly held RE holding companies that are not organized as a REIT, that can invest profits in new ventures rather than distributing them. Anyone know about this?"
Not exactly that, but Brookfield Asset Management (BAM) was one of the world's largest real estate companies (not a REIT), then spun-off its real estate holdings into an MLP (Brookfield Property Partners). Brookfield (parent) owns part of the spin-off, as it does with the prior spin-off, Brookfield Infrastructure (BIP). Brookfield (Parent) gets paid management fees from the spin-offs and has exposure to them.
Brookfield Property Partners (BPY) is a mix of stakes in public (Brookfield's stake in General Growth Properties) and private companies/deals.
"IMO the "industry pros" are typically biased in favor of a rosy forecast. "
Comments
Conventional wisdom also says that REIT equity prices have been inflated by the public's search for yield. With bond rates low-low, shares in REITs have been priced up beyond what their risk-reward would otherwise support.
IMO the "industry pros" are typically biased in favor of a rosy forecast. This is the same phenomena as the sales driven buy-sell asymmetry ... way more issue buy recs than sell recs.
Indeed, this article is not claiming that these CW concerns are not valid - but instead that the market space for the REITs is currently so lucrative that these effects will be offset by demand, and the net outcome will be positive.
But do REITs operate in a vacuum? I would imaging that there must be privately held RE holding companies that are well capitalized without constant borrowing ... or that there must be publicly held RE holding companies that are not organized as a REIT, that can invest profits in new ventures rather than distributing them. Anyone know about this?
Tim
Not exactly that, but Brookfield Asset Management (BAM) was one of the world's largest real estate companies (not a REIT), then spun-off its real estate holdings into an MLP (Brookfield Property Partners). Brookfield (parent) owns part of the spin-off, as it does with the prior spin-off, Brookfield Infrastructure (BIP). Brookfield (Parent) gets paid management fees from the spin-offs and has exposure to them.
Brookfield Property Partners (BPY) is a mix of stakes in public (Brookfield's stake in General Growth Properties) and private companies/deals.
"IMO the "industry pros" are typically biased in favor of a rosy forecast. "
I'd certainly agree with that.