Institutional investors will either increase or maintain their investments in publicly traded REITs over the next 18 months, according to 90 percent of buy side analysts and portfolio managers in a June survey by Broadgate Consultants.
But despite their enthusiasm for the sector, institutional investors share concern in the quality of companies’ disclosure. Almost one-third of the survey respondents indicated that the level of information they receive on underlying assets in REIT portfolios is insufficient to develop an accurate valuation.
Nearly half of the survey respondents said that REITs are not forthcoming with sufficient information to value certain income streams, such as those from joint ventures or partnerships, compared to other business segments.
In general, the survey respondents said that there is a communication disconnect between investors and REIT management. Only half of the analysts and portfolio managers surveyed thought that REIT CEOs and their boards really understand their investor base and what drives their share valuation.
These concerns about transparency come at a time when investors, while generally positive on the REIT sector, do not view it as cheap. Only 10 percent of the survey respondents responded that REIT shares are undervalued.
Nearly 60 percent of the survey respondents viewed the direct participation in real estate of alternative investors such as private equity firms and hedge funds as an opportunity — possibly for co-investment.
“The good news is that there appears to be plenty of demand for REIT company shares among sophisticated institutional buyers,” said Thomas C. Franco, chief executive officer for Broadgate Consultants. “However, institutional investors will be looking much more carefully at individual REITs, their management teams, strategy, strengths and weaknesses. Those management teams that understand their investors and what is important to them are likely to win the most support, assuming the performance factors are equal.”