Capital Side of REIT Investment Has Seen Big Changes
11/14/2012 | by Allen Kenney

Steve Buller, vice president and portfolio manager with Fidelity Investments, joined for a video interview at REITWorld 2012: NAREIT's Annual Convention at the Manchester Grand Hyatt in San Diego.

Buller has been investing in REITs since 1998. When asked about the most significant changes in REIT investment during that time period, Buller singled out the capital side of the business.

"I think people assume that real estate is only about fundamentals or supply and demand, but real estate is a capital-intensive industry. The cost and access to that capital is extremely important. We saw that during the global financial crisis," Buller said. He also mentioned that the amount of capital inflows and outflows have affected the prices of REIT stocks.

European REITs are doing "as well as can be expected" in dealing with the financial problems across the European Union, according to Buller.

"Obviously, the fundamentals are impacted," he said. "We do see most European REITs trading at a discount to our estimated net asset value."

Buller said consolidation could benefit European REITs.

"I'm actually of the opinion that the REIT market should shrink before it has to grow again. There is capital looking to invest opportunistically in Europe. I think it would be better that some of these get taken over, and then shareholders could make money," he said.

Buller also discussed REITs' growth strategies in the current market environment.

"Acquisitions are obviously very paramount in part of their growth strategies. We find that, generally, that's a good thing. That's exploiting their low cost of capital," he said. "Obviously, we've seen in the debt markets that REITs have a huge competitive advantage in where they can borrow at. In addition, given what equity share prices have done in the REIT world, we've seen that cost of capital, both the equity and debt side combined, makes it very competitive to be, perversely, the highest-cost bidder on acquisitions. Those acquisitions have been done accretively, not only to net asset value, but also to earnings per share."