USA: REITs’ own country

Knut UNGER, 2006

“The U.S. Congress created REITs in 1960 to give anyone and everyone the ability to invest in large-scale commercial properties.”, the US-REITs-umbrella NAREIT writes at it’s homepage¹]. “The REIT industry has grown dramatically in size and importance since then, and during the last decade in particular. REITs—also known as real estate stocks—have outperformed most other major market benchmarks over three decades with significantly less volatility.”

Indeed: From 1971 to 2005 the number of 34 REITs with a market capitalization of 1,5 billion $ jumped to a number of 197 REITs with a market capitalisation of 331 billion $. Reasons for this fast development include the burst of real estate bubble in the early 90ies and the burst of the new economy in the late 90ies when private capital (pension funds, insurance companies, bank trust departments, but even individuals) looked for an alternative to invest and found the new assets in the again emerging real estate hype.

There are three major types of REITs :

• Equity REITs own and operate income-producing real estate. This type is the dominating.

• Mortgage REITs lend money to real estates.

• Hybrid REITs are companies that do both.

Within the Equity REITs residential REITs are dominating. In 2005 17 % of the US REITs were residential. Only offices were more important (19 %). With a total return of 30.4 percent, REITs in 2004 outpaced most other stock market benchmarks for a fifth consecutive year.

“The most immediate sources of revenue growth are higher rates of building occupancy and increasing rents”, NAREIT explains, a principal which is repeated permanently throughout the world.

Today there are approximately 200 publicly traded REITs in the U.S., with assets totaling more than $475 billion. In the U.S, besides these companies which are traded on stock exchange even not publicly traded REITs exist, so called private REITs.

Since about 2004 a new trend is occurring in the U.S: More and more publicly traded REITs “go private”. Large share holders are taking the REITs from the stock exchange and create “private REITs”. One reason is the beginning burst of the U.S. housing bubble which makes the stock exchange risky. Even raising interest rates on mortgage play a role and the many new opportunities to invest money in real-estates around the world. REITs within the set opportunities for investors are just one important pawn in the game, they create them and liquidate them depending on their current strategy to increase their returns.

Besides AIMCO there are a couple of other important residential REITs in the U.S.. Some examples:

• One of the largest residential REITs in the USA is the Chicago based Equity Residential Property Trust with 6,8 bn € capitalization². In 2004 judges in Palm Beach charged that Equity Residential violated Florida law by charging tenants an extra 60 days’ rent plus a one-month penalty fee for terminating their leases early. The Illinois-based company also allegedly charged tenants an extra two months’ rent if they stayed through their lease term but failed to give 60 days’ notice of their intention to vacate. Equity Residential has been very active in condo-conversion.

• Praedium Group³ runs six REIT funds that have acquired office buildings, retail properties and multi-family homes across the country. Most holdings are in New York, California and Texas. Invests money from pension funds, foundations, endowments and other financial firms. With $5 billion in assets it requires a 15 to 20 percent return on its investments.

Praedium founder Russel Appel has been outspoken about the profitability of low-income neighborhoods. “We look to take advantage of the opportunities in the marketplace,” said Appel in Commercial Property News last year.

Praedium plays an important role in co-financing the business of Pinnacle Group in New York City where Pinnacle owns over 400 rent-stabilized buildings. The properties are managed through dozens of separate limited liability corporations. Many tenants charge that the supers do shoddy renovations, which have incurred code violations and ruined previous fixtures. They then send bills at inflated rates to residents. Tenants say they have received hundreds of eviction notices, lawsuits and harassing letters, along with exorbitant improvement costs and rent increases beyond the legal limit. They fear they are being forced out to make room for condos. Two Manhattan properties, 706 and 725 Riverside Dr., have begun the conversion process.

• In 2002 tenants groups reported about a long and arduous battle with landlord Madison REIT⁴ in Oakland, a city where 65 percent of the residents had been renters, but nevertheless enjoyed less rights than in other cities. After rents were raised by 20-65 percent by a landlord who claimed exemption from Oakland rent control laws a group of tenants petitioned the Oakland Rent Arbitration Board. Finally Madison REIT rescinded the rent increases.

Madison Park REIT ($60 million in assets) claims to be specialized in “creating value for the company and for the community by making adaptive reuse of older existing buildings”⁵ in the “traditionally unfashionable blue-collar city” of Oakland.

• After Metlife⁶ Inc.‘s (MET, an insurance company) started the process of sale of Peter Cooper Village/Stuyvesant Town on Manhattan’s East Side in August 2006, a couple of REITs announced interest to take over 11,200 apartment units over 80 acres of prime Manhattan land. The value of the property gets estimated at about $450,000 a unit, or $5 billion in total. About 75% of the apartment units are rent regulated, rents are roughly half the market rate. Rents can only be brought up to market rates when a tenant leaves, and many tenants or their families have been living there for decades, Any new owner paying the equivalent of $450,000 per apartment is going to be eager to create a money-making luxury enclave, real estate executives say.

The new owner could check all of the leases carefully to see that the name listed on the lease is the person actually living in the unit, press reported. “Over time, the owner could see significant 50% rent increases or more as tenants leave.”

Thus, many fear that Manhattan will loose one of it’s last and most important residential area which is affordable for workers, artists and the middle class. Anyway it will be the largest real estate deal in US history.