The Deloitte & Touche report, entitled “Breaking Out: A Sea of Change in Real Estate Capital Markets,” suggests that REITs will grow in size as more pension funds invest in the vehicles. In 2003, pension funds held 4% of their assets in real estate; in the coming decade, the study suggests, this could increase three-fold. The report also suggest that global capital markets, which currently hold 5% in real estate, could raise their stake to somewhere between 10% and 15%.
The report also asserts that private real estate equity will be the vehicle of choice for most equity investors during the coming decade, with REITs likely increasing their leverage asset base in that time period. New issuance of common REIT shares should increase over the coming years, the report states, especially if the currently high share prices persist. However, REITs will face increasing competition from other public companies such as real estate operating companies.
The report also offered a prognosis of other real estate product types. Deloitte predicts that the retail market, although healthy at the moment, will see less growth with the rising interest rate environment.
The office market, however, will see a decline in vacancies as the general weakness in the area abates. In the industrial market, Deloitte predicts that accelerating capital spending, rising factory orders and exports will likely increase demand for industrial space in the coming year.
“The last 10 years have been a breakout decade for the property markets,” said Dennis Yeskey, national director of Deloitte Consulting LLP’s Real Estate Capital Markets practice, in a press release. “Now, leaving its niche trappings behind, it will begin to behave more like a commodity investment, something akin to traditional debt and equity. Real estate has outperformed other asset classes during the most recent downturn and the recovery, with returns far exceeding those available in competing asset classes and with minimal volatility. We’ve never subscribed to the notion that the commercial market was overvalued, but the fundamentals show this is a more attractive asset class.”