By Al Barbarino
REITs raised $51.3 billion in public equity and debt, surpassing the $49 billion record previously set in 2006, the National Association of Real Estate Investment Trusts announced on Wednesday. Public equity accounted for $37.5 billion of the capital, breaking the 32.7 billion record set in 1997.
Occupancy rate increases, rent growth and an overall back-to-basics approach to real estate fundamentals throughout the year – coupled with positive trends in broader economic indicators late in 2011 – muted fears of a double-dip recession, driving REIT growth.
“The concern was that the problems in Europe might cause the U.S. economy to go back into recession,” said Brad Case, NAREIT’s senior vice president of research. “During the fourth quarter that concern receded. You got a picture that the economy was improving and that owners of commercial real estate were going to be benefiting from that.”
Inflation-adjusted consumer spending ticked up 0.2 percent in November, as the national unemployment rate fell to 8.6 percent in November (8.5 in December) and the light guiding Europe out of the debt crisis became slightly less dim, causing a swing in REIT returns from -14.62 percent in Q3 to 14.29 percent in Q4.
The FTSE NAREIT All Equity REITs Index’s total returns climbed 8.28 percent for the year, nearly quadrupling the 2.11 percent gain seen in the S&P 500. The dividend yield was 3.82 percent, versus 2.22 percent for the S&P.
“Investors right now are starved for yield-oriented investments,” said Matt Richmond, REIT portfolio manager with Principal Global Investors. “Whether they’re 401k, retail or institutional investors, they are gravitating towards REITS because of their income or dividend yield component and some of the diversification that they bring.”
Low interest rates, credit availability and an improving economy provide a healthy backdrop for REITs, which have outperformed the S&P consistently for decades. Investors are recognizing their strengths more than ever, experts said.
“There’s more demand for the product,” said Dan Rodriguez, director of wealth management at San Antonio-based Investment Professionals, Inc. “It’s still all about earnings at the end of the day and I think they (REITs) have been a fairly reputable play to have accentuated in portfolios.”
Though REITs have actively pursued acquisitions for years, they will have even more wiggle room to play around with equity in 2012 than they did in 2011 – when there was a primary focus on stabilizing balance sheets.
“REITS will use their superior balance sheet and access to capital to go out and buy attractive single-asset acquisitions or a small portfolio here and there of privately owned assets,” Richmond said. “You’re going to continue to see acquisitions made across the landscape – whether it’s industrial, industrial portfolios, New York office, regional malls or apartments.”
In addition, properties purchased in 2007 will hit their 5-year maturities in 2012, as they’re flung reluctantly back into the market by privatized real estate investment managers who paid too much for them then watched prices decline dramatically, Case, of NAREIT, said.
There will be a “continued opportunity to acquire properties at good prices from owners, some of whom are in real financial distress,” he said. “I think 2012 is going to be a really important year.”
Uncertainty in the housing market helped the self-storage and apartment sectors lead the industry in 2011, with total returns of 35.22 percent and 15.10, respectively. Conversely, lodging/resorts, industrial, mortgage and office REITS were down.
REITs own approximately $500 billion of commercial real estate assets, accounting for 10 to 15 percent of institutionally owned commercial real estate. They invest in commercial real estate and must pass 90 percent of their earnings to shareholders in the form of dividends.