On the heels of last year's privatization of some of the largest public REITs, the strong flow of equity capital into real estate will continue in 2007 â€“ but in a different direction, according to Stan Ross, chairman of the board at the University of Southern California Lusk Center for Real Estate.
Ross said some investors who previously had been targeting public REITs will shift to smaller private equity funds and hedge funds as well as limited partnerships, joint ventures and direct investments in niche properties.
â€œShareholders who received attractive payouts when the REITs were acquired are reinvesting some of that capital directly into real estate,â€? he explained.
â€œAlthough prices have increased on investment-grade properties, investors can realize competitive returns on second-tier properties, depending, as always, on the location,â€? Ross continued.
He added that leading metropolitan markets such as New York and Los Angeles will continue to draw investment at the higher prices. Capital will continue to flow into traditional office, retail, industrial and hotel assets, but alternative investments, including urban infill, adaptive reuse (buying, rehabilitating and converting old buildings to new uses), and multifamily/retail development near inner city transit centers, will draw more interest.
Investors in 2007 are still eyeing companies that own portfolios of real estate assets, and there will be more competition for companies and more resistance from some owners to being acquired.
â€œBy buying a company, investors in a single stroke are able to pick up assets they otherwise might not have been able to acquire and assemble in a profitable portfolio,â€? Ross said.
â€œThese investors have the capability to create incremental value by managing assets on their own or through alliances with companies that provide property management and other services.â€?
Following acquisitions, he explained, investors can selectively sell assets that might not fit their investment requirements or management capabilities.
Despite the recent trend toward privatization, Ross said public REITs would remain a magnet for institutional capital. â€œFor the past five years, REITs have outperformed the stock market,â€? Ross noted. â€œSo we can expect more public offerings this year.â€?
Similar to 2006, Ross believes foreign investors will remain active in U.S. markets. â€œFrom a global perspective, U.S. property prices remain competitive, and higher rents are generating increased cash flows,â€? Ross observed. â€œThe weak dollar also has given global investors more buying power on American soil.â€?
Ross added that the continued availability of relatively low-cost debt capital will enable investors to acquire more properties and potentially realize higher returns. â€œThe spreads between the return on investment and the cost of capital are still competitive with other investments,â€? he explained.
â€œIn sum, the broad and deep market for property investment has demonstrated that real estate will continue its dominance as an asset class in 2007."