Coopers & Lybrand: REITs to quadruple

Real Estate Weekly, Feb 10, 1993

Capital investment in new and existing Real Estate Investment Trusts can be expected to double within a few years and quadruple by the end of the decade, according to Tom Robinson, director of Coopers & Lybrand's real estate investment trust practice.

He noted that the response to three initial public offerings of REITS, which in November raised more than $500 million, signals the market is ready to consider new REIT forms as a means of achieving liquidity and greater diversification among real estate investments.

Members of the new generation of REITs may differ from their predecessors in a number of ways:

* More complex ownership structures. To overcome tax problems and regulatory limits on concentration of stock ownership in REITs by a handful of individuals or pension funds, large property owners will experiment with various structures. including REITs which act as general partners in larger limited partnerships, in the manner that the Taubman Centers transaction was cast. Investors' tolerance for the new REITs will depend on evidence that the sponsor and other insiders have aligned their interests with those of the new REIT shareholders

* New Property Types. More PElTs will feature institutional quality assets not historically associated with the public market, for example regional malls and Class A office buildings. New emphasis will be placed on other property types such as industrial properties and mobile home parks, and efforts may be made to bring better quality hotels into REIT portfolios.

* Larger REIT offerings. REIT offerings will be larger than in the past, to take advantage of economies of scale and make the REITs more accessible to institutional investors. The Taubman REIT, which at $295 million is the largest initial public offering of an equity REIT, is leading the way for a number of REITs pending for 1993 which are expected to raise amounts approaching or exceeding $200 million each.

* Higher debt-to-equity ratios. More REITs will move debt up from the 25 percent to 30 percent leverage levels now common among institutional quality REITs. With today's low interest rates, investors will recognize that judicious use of leverage will contribute to the overall value of a REIT.

* Mutual fund involvement. Mutual funds will invest heavily in REITs, attracted by their high total returns and by the hands-on management skills of strong REITs.

* Greater geographic diversification. Large REITs may diversify into three or four regions to protect the stability of their shares, but will be successful only to the extent that they employ regionally based staff with expert knowledge of local markets. Successful REITs are likely to continue to focus on one or two property types.