Published March/April 2014
THE ROLE THAT securitization of subprime residential mortgages played in the Great Financial Crisis has been well documented, but the beneficial role played by another type of real estate securitization – the securitization of commercial real estate equity in the form of stock exchange-listed equity REITs – is just beginning to be broadly understood.
This issue of REIT features an article describing new academic research that explores the positive role REITs exert on the broader commercial real estate marketplace, which has helped mitigate boom and bust cycles over the past 18 years of the Modern REIT Era.
The research, co-authored by Professor Timothy Riddiough of the University of Wisconsin, and Frank Packer and Jimmy Shek of the Bank for International Settlements, is the first of its kind. But their conclusions about the attributes of listed equity REITs that contribute to more resilient real estate markets and a more resilient financial system will be no surprise to members of the REIT industry and its investors and analysts.
REITs contribute to more resilient real estate markets and a more resilient financial system.
The most central of these attributes is transparency. As public companies, stock exchange-listed equity REITs face a high level of scrutiny and are required to provide a level of disclosure that is unparalleled in the commercial property industry. Securities and Exchange Commission filing requirements, stock exchange disclosure requirements, and coverage by securities analysts and financial media enable market observers to see what listed equity REITs own and how their properties are performing. Acquisitionsand development activity also are fully disclosed.
Public market liquidity, bringing with it real-time pricing, lets fans and critics, as well as investors and potential investors, see over various time periods the results of the decisions made by the REIT’s management team. Additionally, the REIT dividend distribution requirement compels REIT managers to regularly return to the capital markets and justify their strategies to access the funds needed to grow their businesses.
The authors make the case that the share prices of stock exchange-listed REITs serve as signals to private landlords and developers, providers of equity and credit, and government regulators. When these other market participants pay attention to these price signals, they tend to evaluate more cautiously their own day-to-day decision making. The result, the authors say, is a moderating effect on the commercial real estate market that helps mitigate excessive development – a factor that was absent in the most recent downturn, which enabled the commercial market to recover far faster than the residential market.
The Riddiough, Packer, Shek study makes it clear that REITs provide real benefits for the broader commercial real estate industry, for investors and for our nation’s economy.
RONALD L. HAVNER, JR.
Chairman, President & CEO