REIT growth predicted to best '96 performance.

Fueled by an impressive track record of total return performance, growing market capitalization and increasing institutional capital, the REIT industry is expecting record growth in 1997, providing the nation's real estate industry with an unprecedented level of health and stability, according to analysts, industry observers and the National Association of Real Estate Investment Trusts (NAREIT).

"In terms of important indicators - strong, industry-wide performance, growing acceptance of this investment vehicle by Wall Street, particularly pension funds, and industry growth as measured by market capitalization and increased liquidity - 1996 has shaped up to be a very positive year for REITS," said NAREIT President and CEO Mark Decker. "At this pace, we are confident that the REIT market is on track for its sixth consecutive record year of positive performance."

Impressive Track Record

According to NAREIT, REITs provided solid returns and significant long-term growth opportunities throughout the year. Through November 1996, REITs recorded a total return of 23-45 percent, compared to 12-15 percent one year earlier. Specifically, equity REITs posted a total return of 22.53 percent, while mortgage REITs and hybrid REITs had total returns of 42-39 percent and 20-08 percent, respectively.

"Despite stock market volatility throughout the year, a number of REIT property sectors, including hotel, regional malls, self-storage, mortgage and office, outpaced the major indices including the S&P 500 Index at 25.44 percent, S&P Utility Index at 3.8 percent and Lehman Aggregate Bond Index at 4.1 percent," said Decker. "1996 was a good test for REITS, and they passed with flying colors."

"Clearly the market is reading that there are some good things going on in real estate, particularly in the REIT industry," said Ken Campbell, chairman of CRA Real Estate Securities, an affiliate of New York-based Jones Lang Wootton Realty Advisors.

REITs typically do not fluctuate with market highs and lows, rather they are designed as a "defensive" holding in diversified portfolios during volatile stock markets in order to provide continued income and long-term gains. Over the past 12 months, REITs have produced a greater annual total return than the S&P 500, yielding 30.23 percent compared to the S&P 500's 27.77 percent return.

"We're seeing some concern that the broader markets are peaking. As a result, a lot of capital is pouring into the REIT industry for defensive purposes," said Campbell.

"REITs have proven once-and-for-all in 1996 that the industry consistently can generate healthy returns and that the REIT vehicle is a safe investment with lower volatility than other equities during a turbulent stock market," concluded NAREIT Chairman Milton Cooper.

Market Capitalization Increases Predicted for 1997

While out-performance has enhanced the investment appeals of REITs for institutional and individual investors, it is equally important to note that the industry is expanding and improving its capital funding dramatically, said Decker.

Since 1991, REIT industry market capitalization has grown from nearly $13 billion to more than $80 billion. The formation of new REITs and the expansion of existing ones have been among the hottest trends in the real estate industry, helping to boost market caps.

The increased volume of secondary offerings is another sign of industry maturation. Through November 1996, REITs completed a record 118 secondary equity offerings, raising more than $10 billion. A record $4.7 billion also was raised in unsecured debt, which is a result of the higher number of investment-grade ratings many REITs have received from the major rating agencies this past year. Currently, 57 REITs have investment-grade ratings. In total, more than $16 billion was raised by the industry over the past year.

"And this is just the beginning," said Cooper, who predicts that industry growth in 1997 may double the rate of 1996. "It's the abundance of this new capital - which is less subject to the mood swings of the general market - that will fuel the continued growth of the REIT industry in 1997 and provide the stability this nation's real estate industry requires."

Kim G. Redding, a partner at the RREEF Funds and president of RREEF Real Estate Securities Advisers, Inc., agrees. "The fact that a growing component of the real estate industry is publicly held will bring increased stability by helping to moderate the peaks and valleys of the real estate cycle going forward."

REITs currently own only 8 percent of the $1.22 trillion institutionally-owned real estate market, however, which leaves substantial room for expansion. Decker predicts that total market capitalization will reach $500 billion within the next couple of decades, with the bulk of the commercial real estate market recapitalized and operated by public and private REITS.

"A liquid, healthy public sector has emerged from the commercial real estate industry, which has been the only sector in American industry that has not had a well-developed public sector - until now. The infrastructure is there for dramatic growth going forward," said Decker.

Institutional Capital Flows Into Industry at Record Pace

According to NAREIT, increased REIT market capitalization has enhanced overall liquidity, which, in turn, has greatly increased the attractiveness to institutional investors over the last several years.

"The REIT industry is large enough now that institutions can have a measure of liquidity," said Redding. "As a result, institutional investors are embracing REITs as an important component of their ongoing investment strategy. This kind of commitment is necessary for the continued growth of the industry."

According to Redding, the relative ease of managing securities compared to direct real estate holdings and the ability to shift investment allocations quickly and easily are among the other advantages which make REITs attractive to institutional investors.

Redding concludes: "The question asked by institutions used to be 'whether and how do we invest in REITs?' Now, the question is 'how much do we invest in REITs?'"

In addition, Decker believes this question also is partly a function of the industry's maturity. 'There now are 12 REIT property sectors that investors choose from in this market," he said. "In addition to determining how much, investors now must consider in what type and in what specific REIT to invest."

The 12 REIT property segments are health care, industrial, office, self-storage, apartments, manufactured homes, strip centers, regional malls, outlet centers, hotel, triple net lease and diversified.

"The depth and breadth of the REIT industry requires investors to look at each individual segment and niche to evaluate performance and opportunity most effectively," Decker said. "The institutional environment has changed dramatically, presenting investment opportunities that have never existed before."

Consolidation Continues: Bigger and Better

As further evidence of the industry's maturation, REITs increasingly are merging with or acquiring other REITs and private real estate companies and portfolios. Larger REITs resulting from merger activity benefit from greater operating efficiencies, increased capital resources and enhanced acquisition opportunities.

The year was marked by several major industry mergers including the largest merger transaction to date between Simon Property Group Inc. and DeBartolo Realty Corporation. Other significant transactions include the merger between McArthur/Glen Realty Corporation and Horizon Outlet Centers and the pending merger between United Dominion Realty Trust and Southwest Property Trust.

Conclusion

According to NAREIT, the REIT industry is poised to continue its rapid growth through 1997, given the combination of strong, consistent total return performance, dramatic increases in market capitalization and liquidity as well as heightened interest from institutional and individual investors.

"Over the long term, I believe REITs as an asset class will continue to deliver strong returns. In the next year, we can look forward to returns in the range of 13 to 15 percent," said Redding.

"The U.S. real estate industry is as healthy as it has been in some time," said Decker. "With the foundation for further growth in place, we have every reason to believe that the REIT industry will continue to gain momentum throughout the 21st century and REITs will become the dominant real estate product in the near future."

Currently, there are more than 300 REITs in existence, approximately 201 of which trade on the major stock exchanges. Total industry assets exceeded $125 billion in 1996.