While there appears to be little appetite for an increase in UK base rates the likelihood is that US rates will rise again in 2017. As a consequence, many property fund managers have been floating the idea of fundraising issues to take advantage of Real Estate Investment Trust (REITs) prices and their disconnection with asset values. While this disconnection is reducing, could a rise in US interest rates prompt new share issues by REITs?
There has been increased demand for REITs in recent times with markets such as India set to prove extremely popular 2017. This demand, and the ability to trade shares on recognised markets, saw many REITs prices pushed above and beyond the net asset value of the underlying property portfolios. Towards the end of 2016 we saw a reduction in this gap between REIT prices and net asset values but there is still scope for fundraising activities.
In essence REITs now have the option, in theory, to issue further shares and raise additional capital based on a share price which is trading above their net asset value. This is extremely attractive in terms of cost of finance especially when you bear in mind that many property investment trusts of days gone by traded at a significant discount to their net asset value. Historically this discount took into account the winding up process, additional costs and potential market movements but the REITs of today are very different.
Is additional capital required?
The big question is whether indeed REITs require additional capital although it could be argued that falling property prices in some parts of the world offer good long-term opportunities. It is also worth noting that the vast majority of REITs have not been overly active with fundraising activities in recent times, instead preferring to sell on early-stage developments to fund future investments. It could be seen as an opportunistic move by the REIT fund managers or it could be seen as a useful way of increasing their war chest with volatile markets forecast for the next couple of years.
Perhaps one of the main reasons why REIT share prices have remained relatively high compared to their net asset value is demand from overseas investors. Even though the REIT sector has increased dramatically over the last few years it is still relatively small compared to the size of the worldwide real estate market. In some ways limited options have pushed prices higher although recent regulatory changes by the likes of the Indian government have paved the way for Indian REITs to begin trading on US markets.
Window of opportunity
At the end of the day the price of REITs is simply a reflection of supply and demand. Would you really criticise REIT managers for taking advantage of high share prices to raise additional capital? In many ways it could be deemed mismanagement not to take this window opportunity especially with US base rates starting to creep higher. The insatiable demand for REITs continues and it is highly likely that fund managers will decide to “make hay while the sun shines” – expect some fundraising activity.