2013 REIT report – the CFO perspective
As real estate investment trust (REIT) regimes mature and grow as an investment sector, companies have to move from an entrepreneurial style of managing their business to a more mature approach.
Efficiency and effectiveness are becoming important differentiators, both for industry leaders and local operatives. CFOs of these organizations play a vital role in helping REITs to make this transition.
Four key areas
There are four key areas where a focus on best practice will be essential to ensure long-term management success. These are:
- The effectiveness of the platform
- The allocation of capital
- Financing the business
- In 2012, REITs accounted for 14% of transactions by volume. Most large caps are likely to undertake acquisitions in the next two years. Transformative acquisitions, however, remain unlikely.
- Development costs and construction in progress were higher in 2012 than either 2010 or 2011 for 9 of the largest 15 REITs.
- Almost 30% of respondent organizations expect to expand into new markets in the next 24 months, but 25% expect to exit some markets.
- Debt on the balance sheets of the largest REITs is rising, but it appears reasonable given current market conditions.
- REITs have raised US$39.4b globally through secondary offerings in the first half of 2013. US markets have been particularly active, although Australia, Japan and the UK have all seen levels of equity raised increase in the first half of 2013, compared with 2012 and 2011.
- Many REITs are becoming more efficient — operational, general and administrative costs in the US REIT sector have declined from 5% of undepreciated book value of property in 2006 to 4.5% in 2012.
Seven implications for CFOs
To achieve best practice in the four areas we highlight above, CFOs, together with their peers on the executive board, need to focus on the following:
- Seek out improvements to the platform
- Identify opportunities to realize economies of scale
- Take a holistic view of risk
- Monitor development costs carefully
- Balance the competencies of senior executives
- Manage debt carefully
- Prepare for interest rate rises
- For a copy of the full report, please visit ey.com/realestate.