US REITs: Fresh funds keep the party going

FOCUS: Despite warnings of rising interest rates and alleged overvaluations, REITs in the USA delivered an excellent performance once again in the first quarter of 2006. A steady capital flow is driving prices onwards.

Annual performance figures for US equity REITs reached 39% at the end of the first quarter of 2006. In comparison: all real estate values worldwide reached 13%, the selection index S&P 500 reached 12%, global shares were just below zero and high yield bonds hit around 7%. The US REITs have thus clearly trounced many capital market sectors once again at the start of 2006 – despite many years of outperformance and despite a phase of poor average revenue growth for some individual REITs. Until last year, things had basically not been going that well: many US REITs have only indicated rising levels of commercial leasing since then and the rents in some areas took an upward turn in 2005 for the first time in six years.
Fundamental factors such as these are the vital driving force for evaluating a REIT for pension fund and general fund managers. In a survey in 2005, the professionals considered interest levels to be the second most important criterion, with the third being the offer of new capital. In actual fact, the continuous flow of fresh funds from other asset classes and from new investor groups plays a crucial role in the evaluation of REITs and is one of the reasons for the ongoing boom.
As early as the 90s, a certain amount of relaxation in legislation led to increased investment by institutional investors (such as pension funds) in US REITs, in which private investors had predominated up till then.