Advisory intelligence: Building real estate for the IRO
The real estate sector is an interesting area, something of its own animal. Although from a measurement perspective that has not always been the case.
It was traditionally driven by broad macroeconomic measurements. ‘Now we are looking at it in a more granular way and examining the fundamentals of each individual property sector,’ says Michael Spector, senior analyst on the real estate and REITs team at Nasdaq Advisory Services.
Therefore, this inevitably creates a varied picture of what is happening in different respective property areas. ‘Some property sectors will continue to outpace others. It is a simple case of supply and demand,’ adds Spector.
This has implications for the IRO on a number of levels. ‘This creates a competition for capital and IROs need to be able to tell a compelling and differentiating story to current and prospective investors on why you should invest in a particular property sector,’ notes Spector.
‘And from an IR perspective, there is a need to wear multiple hats: you are dealing with the capital markets, property investments, leasing, and development. Educating investors on what you’re doing to grow FFO (funds from operations) and consistently cover your dividend – transforming the IR function into a more expansive role,’ observes Spector.
Digging deeper, the IRO must be aware of market details. ‘The IRO needs to understand the metrics specific to real estate, like FFO and NAV (net asset value) and be prepared to speak about how they drive tenant demand and identify opportunities in their current portfolio or through acquisitions.
Having this understanding is essential to the IRO’s ability to shape the investment story and stand apart from the competition,’ adds Spector.
As with the most of the finance and investor world, there has been a President Trump impact. ‘The biggest story was the spike in infrastructure and Prison/Detention REITs (real estate investment trusts) immediately following the election,’ says Spector. Evidence suggests that REITs are in a position to raise the most equity since 2013.
‘The fundamental narrative going forward now is on tax reform. And we are waiting for something of substance to come out. Real estate is a more defensive pocket of the market – so I don’t think we are going to see the fluctuations you see in other sectors.’
There could, however, be some tightening going forward, notes Spector. ‘What we are going to see is more pressure on REITs to either divest of underperforming assets or sell the company in a case where a large valuation gap exists. There is certainly room for contraction. Some of these guys are sitting on vacancy and I think we are going to see some pressure from investors as they look for creative ways to either repurpose space or sell it off. I think we could hear some noise on this heading into 2018 with a ramp up in activism and M&A.’
Having a bearing on this will be the expected interest rate rise later this month. A point supported by the Fed’s last published minutes. ‘The market is expecting a 25 basis point hike. And REITs – as an income producing investment – the common thought is a rise in treasury yields creates less pressure on investors to seek out alternative income through investments like REITs. Additionally, higher rates equate to higher cost of debt, which might be a hurdle for certain REITs,’ notes Spector.
However, overall, real estate fundamentals are solid, concludes Spector. ‘Certain property sectors are definitely positioned better than others given secular trends but overall the commercial real estate market is generally healthy.’
This content was produced by Nasdaq Corporate Solutions and first appeared on Nasdaq's website.