NEW YORK – Real estate investment trusts (REITs) expanded their share of global transaction activity in the sector in the first six months of 2013, but the pace of that activity is likely to drop off through the balance of this year and into 2014. Those views are key highlights of EY’s ‘Global perspectives: 2013 REIT report’ published today.
The report, now in its sixth edition, is based on interviews with EY partners around the world working with major real estate clients and supplemented with data from a survey of more than 80 global REIT CFOs conducted in August 2013.
According to the report, REITs increased their share of transaction activity in the global real estate market in the first half of 2013 and are on track to exceed the US$80b they invested around the world in each of the last two years. REITs now account for one-fifth of all real estate transactions by volume, up from 14% last year. Yet, they are unlikely to keep that pace up, despite many embracing developments and joint ventures as ways to broaden their transaction pipelines.
“REITs have been very active in the acquisition market in the last three years, adding US$230b in assets during that time, so it is hardly surprising that they take a little time to digest that activity,” says Howard Roth, EY’s Global Real Estate Leader. “The US$60b of transaction activity reported in the first half is still very strong, but many REIT teams see challenges ahead in identifying suitable targets, both in terms of the quality of asset and pricing,” he added.
The survey of CFOs suggests it is unlikely there will be much merger activity, either, probably because large REITs that have entered into recent mergers are still completing the integration process. “REITs have a ‘never say never’ approach to the possibility of transformative acquisitions, but nothing in our survey suggests that we will see a trend toward large-scale mergers in the next 12 to 24 months,” says Robert Lehman, EY’s Global REIT Leader.
In fact, REIT teams have been spending a lot more time in the everyday ‘blocking and tackling’ of making their organizations more operationally nimble and efficient, reducing costs and managing risk. This is especially true in the US, where the REIT market is largest and more mature.
According to the report, operational, general and administrative costs in the US REIT sector declined by half a percentage point between 2006 and 2012 and now stand at 4.5% of un-depreciated book value of property.
“The overwhelming trend among all REITs is to transition from an entrepreneurial style of managing their business to a mature, more efficient approach. Efficiency and effectiveness are becoming real differentiators across the sector,” Lehman says.
This trend is most apparent in how REITs approach debt financing. EY research highlights how debt levels in the global REIT sector have been rising steadily since 2010 until at the end of last year total REIT debt stood at US$372b, up from US$361b in 2008. This is largely due to increased leverage among US REITs, which comprise approximately two-thirds of the global REIT universe. While REITs in the rest of the world saw a drop of 8% in balance sheet debt, US REITs added 9% to their debt loads. However, REITs have successfully mitigated the risk of taking on additional debt by “laddering” debt maturities in the last few years. This practice offers some protection against future increases in interest rates and has made REIT debt maturity profiles a “manageable concern,” according to the report.
Another area where REITs are becoming more efficient is in development and construction. EY estimates that development and construction costs for the 15 largest US REITs, increased from US$2b in 2010 to US$3b in 2012 and that more REITs will move into development to deliver new projects or expand or enhance their existing assets. Among larger REITs particularly, according to EY, there is already rigorous monitoring of development and construction expenditures and strong operational controls in place.
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