Nix: We hope a lesson has been
learned that using proceeds from
debt sources to fund ever more
risky bets is not a wise decision.
It presumes that holders can find
a liquid market for an illiquid
investment if needed. Lines
of credit are re-emerging as a
source of capital; however, prop-
erty level debt remains tight. As
real estate fundamentals remain
challenged, it will be telling to
see what REITs do with this
new capital. If they use it to
plow back into risky strategies,
we could see a replay of liquidity
issues within the next few years.
Additionally, some private
open-ended funds are seeing their redemption queues
quickly disappear as investors
become comfortable with their
high quality portfolios and,
Reuter: We believe that REITs
should be included in target-date
funds for the same reasons that
we recommend our clients to
invest in REITs in the traditional
sense—diversification, attrac-
We believe that REITs should be included in
target-date funds for the same reasons that we
recommend our clients to invest in REITs in the
traditional sense—diversification, attractive long-term returns, liquidity and inflation hedging.
REIT: What opportunities do
you see for REITs going forward relative to other organizations in the commercial real
estate space?
Nix: REITs, in general, will
have several important advantages over the near-term
compared to other investments,
such as private, closed-end
vehicles. Those REITs that
have recently been able to add
new equity or restructured loan
maturities will be in a position
to proactively address capital
issues. After having cut budgets
the past 24 months, they will be
able to operate in challenging
market conditions with regard
to rental rates and concessions,
with less concern about looming debt maturities.
As for new acquisitions, we
are not as convinced REITs will
have any significant advantages
compared to new private real
estate vehicles. These funds are
being formed, albeit at lower equity levels than in recent years,
unencumbered by legacy issues,
and will be led by established
industry veterans. The best of
these will be formidable new
competitors for public REITs.
importantly, because the pressure on institutional investors to
liquidate has been reduced with
the rally in the equity markets.
Finally, credit lines are being
reopened to all real estate investors, meaning alternative sources
of capital are becoming available.
REIT: Why do you believe
REITs are viewed as having superior management teams?
Michelle Reuter: REIT management teams are generally
specialized and focus only on
one or two particular property
types or sectors. This specialized
focus puts REIT management
teams in a unique position to
help to create and preserve
shareholder value. The management teams also typically
have significant insider share
ownership which only further
strengthens their alignment of
interest with shareholders.
tive long-term returns, liquidity
and inflation hedging. The goal
of target-date funds aligns well
with the diversification benefits
offered by REITs, which are not
highly correlated with the traditional equity and bond markets.
Additionally, REI Ts can
offer investors inflation hedges
in both recessionary and inflationary environments. While
real estate investments are not
immune to recessions, they can
continue to provide cash flows
in economic downturns.
REIT: The strong trend toward
the use of asset allocation prod-
ucts such as target-date funds
within 401(k) plans and other
defined contribution plans
is showing no signs of abat-
ing. Do you believe that these
products should include REIT
allocations?
REIT: What challenges do you
see for REITs going forward?
Reuter: Because the REIT
market is forward looking, we
do believe that the downward
pressure in underlying net asset
values in the private market
has already been priced into
REIT share prices. We expect
that individual company valuations and real estate fundamentals will be the drivers of
performance and not necessarily
sector positioning or overriding themes. The rising tide
has lifted all boats during the
recent run-up, but not all REITs
deserved the bounce and we
expect some turbulence over the
next twelve months. F
