Following the record IPO levels of 2013, real estate investment trust (REIT) IPO volumes remain strong in 2014, according to the EY’s Global Perspectives: 2014 REIT report.
With US$6.8b raised globally in the first half of 2014, this activity has been positive for the sector, stimulating interest in the REIT concept globally, as well as expanding its range of participants.
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The report, now in its seventh edition, is based on interviews with EY partners around the world working with major real estate clients, as well as EY analysis of data sourced from Dealogic and SNL Financial.
Today, REIT IPOs dominate the real estate industry market as the REIT brand continues to expand and grow globally, whereas, just five years ago, they were only a small component.
REIT IPOs globally exceeded US$20b in 2013, 55% higher than the pre-financial crisis peak in 2005 and more than double the total seen in 2012. REIT IPO volumes account for 72% of real estate IPOs, tripling from just 24% of all real estate IPOs in 2006-07.
More than 70% of capital raised by real estate organizations in the 18 months through 2Q14 was captured within a REIT. Market conditions allowing, further significant activity seems likely during the rest of 2014.
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By GlobalDataHoward Roth, EY’s Global Real Estate, Hospitality and Construction Leader, says: "Monetization of real estate, liquidity and tax advantages are among the benefits that the REIT model includes. This is why REITs are growing in popularity around the world. It’s important to note, however, that the road to success is not simple, and businesses have to consider key steps before going toward this path."
Size of operations
The size of REIT IPOs has been remarkably consistent every year since 2009, with transactions averaging approximately US$300m. Large REIT IPOs are still rare in the industry, but getting less so. While there have been only 13 IPOs above US$1b since 2001, six of these have been in the last year and a half (2013-2Q14), suggesting that investors with an appetite for larger transactions are finding the REIT model increasingly appealing.
Robert Lehman, EY’s Global REIT Leader, says:
"It’s encouraging to see that in recent years the average capital raised per REIT IPO is on par with companies in the financial, energy and power sectors — about US$300m. Going forward, we expect this brand to grow further, although it is likely that investors will remain highly selective regarding which new REIT vehicles to support."
REIT IPOs are a global trend
The report also stated that in 2014, REIT IPO activity has shifted significantly to Europe, where Spain is leading the region with more than US$3b of raised capital.
Roth says:
"The REIT IPO market in Europe will likely remain strong through the second half of 2014, market conditions allowing, with a series of further listings lined up in Spain and the UK. In other parts of the world, Japan also continues to have an active year, while in India, the Securities and Exchange Board recently approved the setting up of REITs, which should open up a new market for IPOs."
Nontraditional REIT market almost quadruples to US$152b
The US nontraditional REIT market has almost quadrupled by market cap from US$40b in 2011 to US$152b today. As a sector, that is larger than the current Japanese REIT market and Australian REIT market. The number of listed equity REITs in the US is 177, excluding private or mortgage REITs, and 34 of these are non-traditional REITs.
The performance of the mainstream US REIT sector has revealed a significant benefit in the creation of new subsectors coming from noncore areas. These areas include real estate assets, such as cell towers; data centers; certain energy infrastructure; manufactured homes; single-family homes; outdoor advertising; document storage; timber; prisons; and gaming facilities.
Concerning this trend, Lehman says:
"As more asset types are converted to REITs, CFOs of real estate-intensive businesses are likely to look closely at the benefits of a potential REIT spin-off for a part of their business. It’s a trend that we think will grow and expand globally over the next several years."
