Kirby: REITs Excel at Capital Allocation

As the commercial real estate market began to approach its peak in 2007, REITs prudently sold off assets, while private funds were net acquirers, according to a study of industry data conducted by Green Street Advisors Chairman and Director of Research Mike Kirby.

REITs sold off $94 billion in assets in 2006 and 2007, Kirby said in a recent note to investors. Meanwhile, private investment funds bought $134 billion during the same period. Prior to that, the overall levels of net acquisitions less dispositions among REITs, equity funds and institutions had tracked fairly closely, according to Kirby's analysis.

The results of his study should encourage institutional investors to shift assets to publicly traded real estate securities, according to Kirby. He pointed out that in 2006 and 2007, approximately 95 percent of institutional capital flows into the real estate market had gone into private funds.

"While private-market players were collectively making horrible capital-allocation decisions, REITs smartly took the other side of the trade," Kirby said. "The 'sell discipline' that REITs collectively displayed as they off-loaded, via privatizations, $130 billion of overpriced real estate to private vehicles highlights one of the strongest arguments favoring public vehicles: interests of managers and owners are much better aligned than in private vehicles."

Kirby noted, however, that the biggest sellers during the upswing were REITs that went private and left the market altogether. He pointed out that many of the companies that remain public today adhered to an allocation strategy that avoided "market timing altogether by allocating about the same amount each year."