Revisiting the question of how relatively quick drops in residential real estate values, say in the range of 10-20 per cent over 2 years impacts on private reits: is there a definitive or quasi-reliable answer to this sort of scenario?
JG
Revisiting the question of how relatively quick drops in residential real estate values, say in the range of 10-20 per cent over 2 years impacts on private reits: is there a definitive or quasi-reliable answer to this sort of scenario?
JG
There are several factors to consider in evaluating this question.
1-Confidence of investors is the biggest factor I fear. Confidence in real estate as an asset to make your rich is at an all time high. This is why we've seen a rash of flippers, people wanting to buy 2-3 properties and "rent them out" When people's houses start losing some serious value this will completely destroy this idea that people have. IMHO people will then start shying away from this sector completely. (A scalded cat fears all water) This will shift money away from the entire sector. People are not smart enough to realize there is a difference between an apartment building and a single family house. Assets will therefore lose value as less people try to buy in and mindlessly flee real estate completely as an asset class
2-If financing is tightened as it was in the USA it will become extremely difficult for businesses including private REITs to finance acquisitions, improvements and raise funds. During the US crash buildings that were fully sold out could not be built because no banks had a sufficient amount of capital to build buildings. The most they were lending was about 5 million per project and so in the case of Sherway 3 for instance they were trying and failed to put together 20 different lenders to build the project.
3- CMHC financing is huge for buildings as you'll save about 2-3% on your mortgage. If CMHC has reached their cap it will be much harder to get this type of securitization. This means that people buying a building will need a higher cap rate to deal with higher interest rates which means that the asset will be worth much less.
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Private REITs don't tend to mark to market their investments, and claim they are above the noise associated with publicly traded REITs. However, your ability to get out depends on them bringing in new money and as BBland stated confidence is key. The private REITs tend to be started by an entrepreneur back by several high net worth individuals. They are in it for a liquidity event (get taken out). If the sector is off, no event. Likewise the ability to finance at different points in the market cycle could bring a weak private to the edge. Never liked the private REIT sector, mostly because of their lack of disclosure, and their control on redemption. Look at US examples, where people ended up with dead money.
OK... those are important considerations, which I need to be alive to.Originally Posted by Mall Guy
Volitility? The ace for privates? Aren't they right in saying that the unit price and yield for Centurion and Skyline (the main Ontario Reits) remained constant, while publicly traded reits bottomed with the rest of the market during the LAST market collapse (2009)? Ergo: one would think the argument that private reits are much less susceptible to market (psychological) highs and lows plausible?
But now, of course, we're facing BOTH a market correction (worldwide) which I think inevitable; AND we are facing a reckoning in the Canadian real estate market, which for me is merely a matter of depth and breath (hoping for a "soft" landing).
If, in the end, we are looking at a much more reasonably priced equity market (read major market correction) and inflation, then private reits would seem, superficially, to have both ends covered? (Because apartment reits (which is what Centurion and Skyling DO) alow the owner to increase rents to cover the effects of inflation)!!!
Just throwing this out .... I'm actually on the fence....and obviously in need of education.
Is the game at this point really reduced to laddered bonds and super conservative pref shares ? I mean, are those of us with a conservative outlook REALLY obliged to start cashing in the private reits?
JG
Yup, no price volatility, but no buying opportunities (RIOCAN @ $12, H&R @ $6) but if the public REITs crash, likely no new investor for the privates, redemption denied . . . the sponsor needs to find new cash to pay you, no new cash, you can't exit, but no price volatility . . . like a paper loss on your house, if you don't have to sell it in a down market you didn't loss any money . . . again, read some of the horror stories out of the US, people and estates trapped as the market nose dived . . . not saying I don't like Centurion and Skyline, but closely review their redemption policy, management fee, asset management fees, special earn outs, fees for acquisitions, fees for charging fees, AND the market the buildings are located in, employment, major employers, and the REITs debt policy . . . my main concern has always been their disclosure . . . visit League Partners and tell me if you learn anything about their properties (I understand you get a nice "blue book" but not so much on the disclosure side IMO)
Private REITs do not have a lot of regulation. Real estate is ripe for manipulation of the numbers. A lot of private REITs can easily become a Ponzi scheme if the people running them are so inclined.
They can also be illiquid.
In many cases, the managers are the only ones who are confident of making money. I'd be very careful of a private REIT.
I'm not JustAGuy (without spaces).
The point that liquidity can dry up is a huge negative. Just ask investors in venture capital funds. By contrast, publicly-traded REITs are extremely liquid. You will get your cash in 3 days after the trade settles.
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I believe you'll find most private REITs rely on private money (the investor's) to finance their acquisitions. They often raise more money in their offerings than the amount of the actual purchase. The extra money covers fees and covers expenses.
They rarely get loans, and CMHC is even rarer from what I've seen, so these wouldn't really play a role.
Investor confidence however is key. That's why they often have slick marketing, and are often abused.
I'm not JustAGuy (without spaces).
I think we have become "Just A Mall Guy", well said! Private REITs are for those who can take a large position and can have influence on management!
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