Real estate investment trusts made an impressive mark in 2012 and as a result of continuous positive fundamentals as well as low interest rates, REITs are expected to generate double-digit returns this year, according to a research report by RREEF Real Estate, a member of Deutsche Bank Group (DB).
As a result, strengthening income growth as well as expanding dividend payout ratios will provide investors with steady growth over the next three years, the report stated.
"This positive momentum in the public markets bodes well for private markets, which typically lag REITs by three to four quarters," RREEF Real Estate noted.
The REIT sector outperformed its estimations in 2012, returning about 20%, according to the National Association of Real Estate Investment Trusts all equity index, compared with about 11% for the private real estate market as measured by the NFI-ODCE – Open End Diversified Core Equity.
Some of the outperformance was due to higher leverage for the public sector, the outlook noted.
Additionally, the 2012 marked the fourth consecutive year in which REITs outperformed the Standard & Poor’s 500.
"Fundamentals are shifting and investors are aware of supply concerns. However, industrial product has turned around after lagging the overall index for several years, becoming an outperformer in 2012," the outlook said.
Thus, investors are moving into the sector because occupancy is recovering and rents are beginning to grow, the report indicated.
Stock values are currently in line with REITs’ net asset value premiums, but property fundamentals are improving and real estate securities are continuing to have a favorable cost of capital compared to private real estate investors, with unsecured debt and equity yields at record lows, the report noted.
As a result, REITs are using this advantaged to acquire and develop assets at accretive spreads. Additionally, the Trusts provide fuel for future transactions by holding onto cash for investments and keeping dividend payout ratios near the minimum requirement, according to the outlook.
Increasing property-level net operating income as well as expansion of the dividend payout ratio is projected to result in investor income growth of 10% annually over the near term, the report stated.
Positive momentum in the public markets bodes well for the private side. As a result, real estate securities tend to lead private real estate by three to four quarters with returns in the private markets likely to rise during the next year based on current REIT trends, RREEF Real Estate said.
"The accompanying exhibit shows the lag for private real estate returns versus the public market share premium," the report stated.
Additionally, new REITs entering the market over the past year as well as more expected in 2013 will mean more capital coming into the sector, translating into further price increases, which should support higher capital appreciation this year on the private side, according to the outlook.