The public marketsÂ' ownership of real estate declined across most property types, even though public real estate companies increased their capital-raising activities, according to Prudential Real Estate Investors (PREI) annual public market commercial real estate penetration study, which was published recently.
The declines in the share of commercial real estate owned by real estate investment trusts (REITs) and real estate operating companies (REOCs) ranged from a 0.3 percent decline for apartment properties to a 1.4 percent decline for retail mall properties, according to the report. Of six property types tracked by PREI, only office properties saw a gain in public ownership, with a slim 0.2 percent increase.
For the second straight year, REITs also outperformed the broader equity markets in the United States by a wide margin. Equity REITs delivered total returns of 14 percent, according to the NAREIT equity REIT index, well ahead of the 7.4 percent for private real estate, along with the negative returns for most major public market indices. The study considers properties in the United States that are at least 50% owned by REITs or REOCs.
'This trend illustrates strong cross-currents in the real estate business' said Youguo Liang, managing director of research at PREI. 'Although property market conditions deteriorated, capital flows were strong as real estate, including public, private equity and debt instruments, became safe havens for investors looking for some shelter from the falling stock market and volatile bond market.'
But while the new interest in the sector led to intense competition for a few selected property types, falling interest rates allowed property owners to refinance their properties with hopes of weathering the market downturn, rather than facing an uncertain transactions market. The net result was a reduction in acquisition activity for public real estate companies.
Declines were significant for warehouses, hotels and retail malls, but were relatively small for apartments and non-mall retail properties. Market dynamics largely kept public real estate companies on the sell-side of the transactions market in 2001, where they took advantage of the strong capital inflow to selectively sell assets. Many REITs that did increase their asset base in 2001 did so through new developments.
The acquisition of public companies by private firms contributed to the continued decline. Five takeovers during 2001 took properties from public-side ownership. Acquisitions included the Calwest acquisition of the Cabot Industrial Trust, along with the US Retail Partners purchase of First Washington Realty Trust. Management buyouts of Vinings Investment Property Trust, Westfield America and Sunburst Hospitality also removed properties from the public side.
Delisting actions also affected REITs and REOCs. Three firms lost their listings on major exchanges in 2001. While delistings do not affect public market penetration, they do curtail equity-raising potential for the affected firms and usually result in a sharp drop in share liquidity. Sales activity among REITs remained strong for the second straight year, while acquisition activity remained relatively subdued.
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