Hogan: Investors are “voting with their pocketbooks.”
ELLICOTT CITY, MD-August fundraising by the direct investment industry, including both non-listed REITs and business development companies, set a new monthly record on top of the previous months record. In a four-week period that traditionally sees a slowdown in activity due to vacations, the industry topped $2.6 billion. Coupled with Julys total, the tally for the most recent two months alone has been close to half the $6.5 billion recorded for the first six months of 2012, according to the Investment Program Association, a trade organization headquartered here.
Data developed by Robert A. Stanger Co., a Shrewsbury, NJ-based investment banking firm that specializes in the sector, show that equity capital flows to direct investments for the first eight months of 2013 reached nearly $16 billion. That compares with $8.9 billion during the same period in 12, marking a 79% year-over-year increase.
Stangers Kevin Gannon says total equity capital flows to public direct investments will top $18 billion this year and are likely to reach $20 billion. That would exceed the previous 12-month high watermark, established in 2007, by more than $6 billion.
Its been almost like a perfect storm, the past 12 to 18 months for the industry, Kevin Hogan, president of the IPA, told GlobeSt.com recently. Start with the retail investor demand, with portfolio diversification probably the number one reason. Yield and capital appreciation are number two.
Couple that with the fundamentals at play here: improvements in CREs metrics and an interest rate environment thats still low by historic norms. Then consider that the direct investment industry has been producing some very favorable results in the past 18 months, with very attractive yields and the capital appreciation that has resulted from a significantly larger number of liquidity events, says Hogan.
The sponsors are liquidating for investors and that money is being reinvested back through the marketplace,” he says. “Add all those things together, and they’ve really created an environment where investors are voting with their pocketbooks in support of the industry.
The dollar volume of liquidity events is up, way up, compared to last year. While $3.6 billion of liquidity events occurred in the final six months of 12, the first half of this year saw $11 billion worth of such events. Another $8 billion is in the offing, thanks to the pending liquidations of American Realty Capital Trust IV, Columbia Property Trust and Corporate Properties Associates 16Global.
A successful liquidity event has two components, Hogan comments. First, timely execution compared to what investors anticipated when they purchased shares of the non-listed REIT. Second, and more important, a liquidation value at a premium to the $10 original issue price of the shares.Programs that purchased real estate assets in the wake of the 07-08 financial crisis have generally provided such premiums to their investors, according to the IPA.
Although the tailwinds are there for more such liquidity events, as well as a continued favorable outlook for the non-listed REIT segment, Hogan acknowledges that the scale on which this sector operates is smaller than the universe of publicly traded trusts. Among other reasons, institutional investors are more likely to favor the latter.
At the same time, though, Hogan notes that the traded REITs trade more like stocks, and so theyre going to be more subject to the fluctuations of the stock market, although the underlying investments are hard assets, real estate assets. Most advisors that I talk to in the marketplace see a place for both of these products in their clients portfolios, and thats how we see it as well.