06/04/2013 | By Allen Kenney
Michael Hudgins, real estate strategist with J.P. Morgan Asset Management, joined REIT.com for a video interview in Chicago at REITWeek 2013: NAREIT's Investor Forum.
With commercial real estate property pricing at the 2007 market peaks, Hudgins discussed how trends in pricing are affecting his outlook for REIT investment.
"REITs right now are growing cash flow from a depressed base," he said. "They've moved past this peak, but still are generating [net operating income] at the property level of about 4 percent year on year. Additionally, I see no reason why with low supply and incremental demand that REITs can't continue to grow that NOI at a 3 percent year-on-year rate for the next couple of years. What that means is that year on year, as the cash flow increases at the property level, values should increase."
Hudgins also offered his opinion on the value of REIT shares in the current market environment.
"I like to remind investors that REITs are a combination of three things - real estate, equity and bonds," he said. "When I look at REITs right now, they look expensive versus equities. They still look slightly cheap versus bonds. The tiebreaker is real estate. Rationally, REITs should be trading at a premium to real estate."
Hudgins gave a preview of what he thought would be the major stories in the REIT market in the second half of the year.
"I'm, personally, curious to see how single-family housing REITs do," he said. "Do they demonstrate that they can actually be cash generators? I think that's going to be critical. If you're going to be a REIT, it's all about generating cash and paying out a dividend."