As debt for real estate deals becomes harder to come by, some institutional investors are entering into joint ventures with REITs to develop direct real estate investments.
Real estate investment trust managers have been spending more time lately shopping the idea, which is not entirely new, to investors.
The concept is attractive to institutions with larger and larger real estate allocations to invest and to REIT executives looking for a source of capital other than the debt markets. Foreign pension plans also are entering into joint ventures with U.S. REITs to take advantage of the favorable currency rates.
Recently, the $174 billion California State Teachers Retirement System, Sacramento, invested about $650 million with an existing joint venture (bringing its total investment to $1.6 billion) and entered into two new ones with First Industrial Realty Trust, Chicago.
Also, Macerich Partnership LP, a Santa Monica, Calif., REIT, joined with Alaska Permanent Fund Corp., Juneau, this month to buy a mixed-use development and shopping center in Chicago for $515 million. Alaska Permanent invested half of the purchase price.
Joint ventures are ongoing and growing, said Meredith Despins, vice president of the National Association of Real Estate Investment Trusts, Washington.
Pension plans are driven by REITs strong track records in real estate management, said Brad Case, NAREIT vice president of research and industry information.
Get what they want
The advantage for institutional investors is that they get exactly what they want, whether they want a bunch of Kroger or Wal-Mart anchored strips or industrial, said Barden Gale, vice chairman of real estate with Starwood Capital Group LLC, Greenwich, Conn., a real estate investment management firm.
These joint ventures also give pension funds more control than traditional direct real estate investment. If they want to sell a property owned by the joint venture, they sell it, and pension funds have been able to negotiate fairly low management fees while still giving the REIT a slice of the profits, Mr. Gale said.
Earlier this month, CalSTRS and First Industrial Realty Trust formed a $475 million joint venture to invest in industrial real estate in Belgium and the Netherlands. CalSTRS will initially invest $150 million in FirstCal Industrial Europe; First Industrial will commit $17 million.
A few days later, CalSTRS and First Industrial announced a second joint venture to buy industrial real estate in Canada. FirstCal Industrial Canada will have an initial capital infusion of $100 million. CalSTRS will initially contribute up to $90 million; First Industrial will invest up to $10 million. The joint venture expects to use 35% equity and 65% debt, amounting to about $285 million in buying power.
In December, CalSTRS had added $200 million to another joint venture with First Industrial that targets properties in North America.
Executives at the $39 billion Alaska Permanent Fund like the idea of the alignment of interests as well as getting a joint venture partner that is an expert in operating the properties, said Michael Burns, chief executive officer of Alaska Permanent, which has about 10% of total assets invested in real estate.
Alaska has two joint ventures both large shopping centers with Macerich. We very much like the idea of alignment of interest. We are 50/50 partners and we liked the way they operate malls, Mr. Burns said.
Operating a large shopping mall requires different skills than pension funds typically have in-house, Mr. Burns added. You need somebody that is constantly talking to Macys and Nordstroms, he said.
We expect more joint ventures in retail because access to capital has become an issue for REITs and real estate investment managers, explained David J. Oakes, chief investment officer of Developers Diversified Realty Corp., a retail REIT in Cleveland.
DDR entered into two of last years largest joint ventures in the U.S.: a $3 billion venture with New York asset manager TIAA CREF and a $1.5 billion commingled venture with a group of six domestic and international pension funds to buy grocery-store-anchored shopping centers in the southeastern United States.
A year ago, getting the capital to invest in properties was not an issue because debt was easy and cheap, Mr. Oakes said.
Now that the world is short on capital, we see a lot of opportunities coming our way, and having access to broad capital sources we see as an advantage, he said.
REIT joint ventures are not without their risks. An Australian listed property company (somewhat similar to REITs) Centro Properties Group, Melbourne, lost 90% of its value in December and has until Feb 15 to refinance A$3.9 billion (US$3.4 billion) Sources say investors are preparing to sue the company. Centro in Australia is imploding and taking itself apart Starwoods Mr. Gale noted.
A number of pension fund investors prefer to get access to REITs through commingled funds because in a joint venture the REIT is also a fiduciary to shareholders.
Even so, some investors are getting access to REIT joint ventures through their commingled real estate fund investments. For example, in December, JPMorgan Asset Management Inc., New York, entered into a joint venture with Apartment Investment and Management Co., Denver. Under the deal, the REIT and JPMorgan will co-own three apartment properties formerly owned solely by the REIT. AIMCO received $202 million capital infusion in exchange for selling JPMorgan a 47% stake in the apartment complexes. At the same time, the REIT will continue to manage the properties for a fee.
International pension funds are also in the market to invest with REITs as a result of favorable exchange rates and comparatively low interest rates.
A lot of foreign pension funds are investing in the United States with REITs, said Steve Lyons, partner in law firm, Reed Smith LP. I think well see more of that as long as the exchange rates continue the way they are.