What a difference a year makes.
Managers of real estate investment trusts and other real estate securities saw assets under management climb 29% to $160 billion in the 12 months ended June 30, according to Pensions & Investments' survey of the largest real estate money managers.
In the year-earlier survey, assets invested in real estate securities had fallen 44% to $123.6 billion.
Assets invested in REIT securities for U.S. institutional tax-exempt clients rose 5% to $43.66 billion after a 36% fall in the survey for the year-earlier period.
Industry insiders say REITs are now at a crossroads. The question is whether REIT managers have learned their lesson after many flirted with bankruptcy because of leveraging up their balance sheets with short-term debt.
“The REIT sector has come a long way since the declines. Going forward, we will need to see fundamental improvement coming from tenant demand in order for REITs and private real estate to experience capital appreciation gains,” said David Brunette, senior research analyst, real estate, with Russell Investments in Tacoma, Wash. “We are at a critical juncture here with the economy. Hopefully, the industry will position itself to weather the storm should economic growth falter.”
“A lot (of the increase in REIT securities assets under management) could be attributed to the movement of the market,” Mr. Brunette said in an interview. “It's basically been an environment where investment managers were trying to keep existing client assets; that's been the major push, and not necessarily winning business from other investors that did not have exposure to REITs.”
The U.S. REIT market experienced a big rally on the heels of heavy declines in the fourth quarter of 2008 and the first quarter of 2009. The NAREIT Equity index return was 53.9% for the 12 months ended June 30.
“That (strong return) and dividend yield looks mighty attractive to investors” who can get these and cash flows from a liquid, tradable security, said Gary Koster, global leader, real estate fund services in Ernst & Young's New York headquarters.
When investors look at what else is in their alternative investment portfolios that produce yield or income, REIT stocks look “very, very attractive,” Mr. Koster said.
Managers of real estate securities agree, though, that much of the increase in assets was courtesy of the market.
Cohen & Steers Inc. was at the top of the ranking of managers of REIT securities, with $18.36 billion, an increase of 66.6% from a year earlier.
Stephen W. Dunn, New York-based executive vice president and director of institutional marketing, noted that the increase in the firm's assets under management was , in part, from the “dramatic rebound” of real estate securities across the world. In 2009 and so far this year as well, there were “strong flows” of investment dollars in separate account, commingled funds and subadvisory, he said.
Invesco Real Estate's real estate securities assets rose 61% to $8.8 billion, with tax-exempt assets growing 42% to $1.8 billion.
Max Swango, managing director who works in the firm's Dallas office, said much of the increase is due to the “simple math” of market appreciation.
In addition, he said, Invesco Real Estate gained more than $1 billion of new net capital in 2009.
“We have been managing REITs for 22 years and 2009 was the second-largest year in terms of net fund flows. In 2010 we still see significant positive fund flows but it's roughly half of what we saw in 2009 and flows are from all over the world,“ Mr. Swango said.