The differences between public and private REITs may be subtle, but their behaviour in the market can be as different as night and day, and that can impact price point.
“The public REIT space is bigger, there’s no question about it,” says Greg Romundt, the founder and president of Centurion Asset Management Inc. “But the major areas that they are different are that the public has shares that are on the exchange, and they can be volatile, with prices determined ‘by the guy who is in his pyjamas in his kitchen.’”
And it is that “guy who is in his pyjamas” who can have a considerable impact on the value of the assets, says Romundt.
“As we saw in 2008-2009, those prices often didn’t make a lot of sense, so we had REIT prices dropping 40-50 per cent on the publics,” he told WP, “but the actual value of the assets – certainly in my business which is apartment buildings – barely budged at all.”
Romundt, who has been in residential real estate investment since 1997 and the investments and financial markets since 1991, describes Centurion’s client list as being a mix, which points to the wide demographic of investors.
“There are not a lot of very large private REITs,” he says. “They run the gambit – you have some that are basically all institutional money, there’s no individuals in there at all; you have some that is all retail money, raised by the fund operator; and then you have guys like us who are mostly from the investment channel, so the banks, the brokerages, etc. who put their money with us. We have a very diverse bag of clients.”
The attractiveness of the Canadian REIT market is reflected in recent Bloomberg News data, which shows that stockholders are paying 13 times a Canadian REIT’s funds from operations to own shares in 51 companies, compared to shareholders in 210 U.S. REITs who forked over 20 times the cash-flow measure at the end of last year – the widest these ratios have been since 2009.
But if anyone was to look at the public versus the private real estate market, says Romundt, the amount of real estate held by institutional investors is actually in the low double digits.
“The last numbers I saw was 11 per cent of all investment grade real estate is actually held by institutions,” he says, “and the rest is held by individuals and partnerships and friends and family.”
In terms of public REITs versus private REITs, the public REIT market is bigger than the private REIT market. “But you are only talking about a legal structure at that point,” Romundt points out, “as opposed to the underlying market, where that relationship has completely flipped on its head.”
Back in 2013, pension funds were piling into REITs, making up almost 10 per cent of the investment volume in the commercial real estate market for that year.
But that market has become saturated in the retail real estate sector, which has been attributed to the “Wal-Mart effect.”
Back in 1994, Wal-Mart had planned to build outlets in 130 locations; but that number has exploded to more than 300 operational stores in Canada alone. And with the recent $1.16 billion Calloway REIT deal that saw Calloway acquire SmartCentres Management Inc., that makes them the largest landlord to Wal-Mart Canada.
Advisors helping steer clients to either public or private REITs generally lay out their options first, says Romundt.
“The way we think of private REITs is that it is the closest thing to buying the actual real estate, so it is an indirect form of direct real estate ownership,” he says. “With publicly traded REITs, you have the risk of the stock market. That’s how I would distinguish the major differences between the public and private.”
Centurion is an asset manager of two vehicles, says Romundt, “and both of them are a private structure; one of them is an apartment REIT, and the other one is a kind of lending and equity development fund.
“Someone doesn’t come in to me and say ‘build me a portfolio of REITs;’ that’s not what we do. Most of our clients come from other financial advisors, or are institutional investors.”
Tomorrow: Where are the opportunities for investment?