A surge in companies filing for ‘real estate investment trust’ status may lead to added scrutiny over which companies should qualify, analysts claim.
Nonetheless, REITs continue to be an attractive investment opportunity due to high performing dividend yields and today’s low interest rate environment.
“Competition for tenants across the commercial and residential real estate sectors is something to watch this year. On the residential side, the multi-family segment has led most of the discussion around market improvement, but, as housing buys pick up, rental properties could suffer,” said Stuart Eisenberg, partner and real estate practice leader at BDO USA.
He added, “The commercial space continues to struggle with high competition due to conservative growth and spending practices.”
Despite a slight decline in the number of REITs citing interest rate increases as a risk — 88% compared to 82% — the increase in interest rates could have a fundamental impact on cash flow and distributions.
Failure to qualify as a REIT is among the top risks for firms, according to a report issued by BDO.
While general economic conditions are also cited as a key risk, the threat of property liquidity was 82%, down from 89%, suggesting housing has turned a corner.
Meanwhile, of the 100 largest publically traded REITs, access to capital continues to be a top risk. However, only 84% of REITs cited capital as a risk this year, compared to 97% last year, the report said.
“This slight decrease could further underscore a positive change in market conditions,” BDO stated.
On the other hand, strong competition for lessees and prime real estate is more of a concern this year for REITs than a year earlier.
REITs also cite indebtedness as a top risk, which may be a sign that many firms have underlying properties that have unfavorable loan-to-value ratios.
The retail real estate space, which faced many years of low consumer spending coupled with competition from online retailers, may be heading into a period of recovery.
For instance, only 29% of REITs note the loss of a major anchor or tenant as a risk, compared to 31% last year, the report said.
