Portfolio asked veteran REIT analysts to forecast where they see the industry heading over the next 10 years. All of them anticipate that the industry will build on the momentum gained since the early to mid-1990s. If the analysts’ expectations hold true, the forecast for REITs will include significant returns, a deeper pool of investors and the continuing expansion of cross-border activity.
"The taxable REIT subsidiary will become an increasingly larger element of REIT business plans, and the best REITs will generate more fees and
control larger real estate portfolios while using less of their own equity capital.
We expect that the top 50 REITs will double their dividends in less than 10 years from now. Under this assumption, if we apply a standard dividend discount model, REITs are undervalued at current prices. This leads to our single most significant predicted change for REITs: investors are likely to begin recognizing and paying for REIT enterprise value in the next few years. Beyond simple real estate asset value, the best REITs will see their share prices reflect the portion of the business that relates to management skills, operating leverage and balance sheet capacity."
Carey Callaghan vice president of credit risk management and advisory
Goldman Sachs, & Co.
Consolidation, which has slowed down in the last few years, has arguably started to pickup—for example, the acquisitions by ProLogis (NYSE: PLD) of Keystone Property Trust (NYSE: KTR) and by Simon Property Group (NYSE: SPG) of Chelsea Property Group, Inc. (NYSE: CPG)—and will continue at a higher rate going forward. Retail and industrial REITs will see the most consolidation and there will be a general trend of smaller companies going private or being absorbed into larger companies. In terms of disclosure, less will be more. As the reporting schedule is condensed (which will happen in 2005 when 15 days will be removed), companies will move toward providing less disclosure because of timing
constraints and cost issues. I think investors will have to live with that.
David Fick managing director and senior real estate analyst
Legg Mason Wood Walker, Inc.Globalization, globalization, globalization.
The REIT industry will continue to become more global going forward, from U.S. REITs owning assets in Europe and Asia, to raising our equity and debt in these parts
of the world. Latin America will become more popular and eventually
[REIT-like investment vehicles] will encompass every continent.
In 10 years, we may see at least one REIT become one of the
30 Dow Jones Industrial companies at this pace of growth.
Jay Leupp managing director and head of U.S. equity research at RBC Capital Markets
"I don’t foresee a time in the next 10 years when there will be less than
100 REITs. At BB&T, we expect new generations
of REITs to pop up as valuations expand and there will be plenty of room
for more players going forward. Over the next
10 years we expect an
increase in REIT allocations within pension funds and defined contribution plans…Until people learn how to age backwards,
we don’t expect the
demand for REIT shares
to diminish."
Stephanie Krewson senior vice president and senior equity REIT analyst
BB&T Capital Markets
"It is conceivable that the current market cap of the REIT industry could double
in the next 10 years. Throughout that time,
REITs will continue to set the standard of good corporate governance practices.
Additionally, there will be large mergers with more
diversified real estate
companies and more
of a market for niche-type real estate. We are already starting to see more
specialized REITs, which offer better growth and
experience in that area."
Jonathan Litt managing director and senior real estate analyst
Citigroup Smith Barney
"In the coming years, the REIT space will change in four meaningful ways. First, the size of the
industry will increase dramatically from the current 10 percent penetration rate of U.S. commercial real estate. Second, the composition of earnings will evolve into a more evenly divided mix between wholly owned assets, joint-venture arrangements and service/merchant building businesses, so as to take
advantage of both the variety of capital sources available to a REIT and to
maximize bottom line returns on equity. Third, the investor base will be broader,
including foreign investors, retail investors and virtually all domestic institutions. Finally, the concept of net asset value may carry less relevance, as earnings will not just consist of cash flow from rents, and a broader investor base will be more focused on growth prospects relative to other investments."
Michael Mueller and Anthony Paolone vice presidents and analysts at J.P. Morgan
"The biggest theme in REIT
investing over the next 10 years
will be the broadening of ownership. More and more portfolios will have some allocation to REITs. To meet
the growing demand for public
real estate, real assets will ¾ow from
private to public ownership, fostering growth for existing REITs and
leading to the creation of many new companies—which I expect will ½ll
numerous niches within real estate,
allowing more types of properties to
be pooled into public
companies."
David Loeb managing director of real estate
Friedman, Billings, Ramsey
"Ten years from now REITs will
be viewed as another sector in the overall stock market."
David Shulman senior research analyst of equity REITs
Lehman Brothers
"We expect five to 10 companies to have major international operations,
both in Asia and Europe. REITs will have global
appeal to yield-oriented investors. Also, they will be the largest
owners of property in the United States with control of nearly
$1 trillion of assets, or roughly 50 percent of the institutional quality assets."
Louis Taylor senior analyst at Deutsche Bank Securities
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"The taxable REIT subsidiary will become an increasingly larger element of REIT business plans, and the best REITs will generate more fees and
control larger real estate portfolios while using less of their own equity capital.
We expect that the top 50 REITs will double their dividends in less than 10 years from now. Under this assumption, if we apply a standard dividend discount model, REITs are undervalued at current prices. This leads to our single most significant predicted change for REITs: investors are likely to begin recognizing and paying for REIT enterprise value in the next few years. Beyond simple real estate asset value, the best REITs will see their share prices reflect the portion of the business that relates to management skills, operating leverage and balance sheet capacity."
Consolidation, which has slowed down in the last few years, has arguably started to pickup—for example, the acquisitions by ProLogis (NYSE: PLD) of Keystone Property Trust (NYSE: KTR) and by Simon Property Group (NYSE: SPG) of Chelsea Property Group, Inc. (NYSE: CPG)—and will continue at a higher rate going forward. Retail and industrial REITs will see the most consolidation and there will be a general trend of smaller companies going private or being absorbed into larger companies. In terms of disclosure, less will be more. As the reporting schedule is condensed (which will happen in 2005 when 15 days will be removed), companies will move toward providing less disclosure because of timing
constraints and cost issues. I think investors will have to live with that.
Globalization, globalization, globalization.
The REIT industry will continue to become more global going forward, from U.S. REITs owning assets in Europe and Asia, to raising our equity and debt in these parts
of the world. Latin America will become more popular and eventually
[REIT-like investment vehicles] will encompass every continent.
In 10 years, we may see at least one REIT become one of the
30 Dow Jones Industrial companies at this pace of growth.
"I don’t foresee a time in the next 10 years when there will be less than
100 REITs. At BB&T, we expect new generations
of REITs to pop up as valuations expand and there will be plenty of room
for more players going forward. Over the next
10 years we expect an
increase in REIT allocations within pension funds and defined contribution plans…Until people learn how to age backwards,
we don’t expect the
demand for REIT shares
to diminish."
"It is conceivable that the current market cap of the REIT industry could double
in the next 10 years. Throughout that time,
REITs will continue to set the standard of good corporate governance practices.
Additionally, there will be large mergers with more
diversified real estate
companies and more
of a market for niche-type real estate. We are already starting to see more
specialized REITs, which offer better growth and
experience in that area."
"The biggest theme in REIT
investing over the next 10 years
will be the broadening of ownership. More and more portfolios will have some allocation to REITs. To meet
the growing demand for public
real estate, real assets will ¾ow from
private to public ownership, fostering growth for existing REITs and
leading to the creation of many new companies—which I expect will ½ll
numerous niches within real estate,
allowing more types of properties to
be pooled into public
companies."
"Ten years from now REITs will
be viewed as another sector in the overall stock market."
"We expect five to 10 companies to have major international operations,
both in Asia and Europe. REITs will have global
appeal to yield-oriented investors. Also, they will be the largest
owners of property in the United States with control of nearly
$1 trillion of assets, or roughly 50 percent of the institutional quality assets."