The real estate investment trust market has surged in recent years, and Signet Banking Corp. is the latest bank hoping to catch the wave.
"There has been a shift from private ownership of real estate to the capital markets. We positioned ourselves to continue to play a role in the evolution of the real estate industry," said Kevin Cashen, senior vice president of the company's lead bank in Virginia.
Richmond-based Signet, with $11.7 billion in assets, restructured its commercial real estate unit to focus on two emerging markets: financing for REITs and originating, packaging, and securitizing long-term loans.
REITs typically use lines of credit of $100 million to $200 million to acquire properties.
After most of the line is used, the REIT taps the equity market to pay down the line, according to Chris Lucas, vice president of research for the Washington-based National Association of Real Estate Investment Trusts Inc.
Frequently, the lines are established by an agent bank that forms a syndicate of participating institutions. Some of the major players in the REIT market are Bank of Boston Corp., First Chicago Corp., NationsBank, and Citicorp.
Eric Lawrence, vice president of Signet, says he isn't concerned that his primary competitors are much larger.
"It's not a big problem. The large banks are looking for other banks to participate in the credit lines. Often they'd rather let a smaller regional player participate than one of their head-to-head competitors," he said.
According to industry surveys, the number of REIT initial public offerings was 141 last year, up from 35 in 1991. The market capitalization of REITs had increased from $8.5 billion in 1990 to more than $43 billion by the end of last month.
Mr. Lucas said the REIT boom was primarily fueled by a need for alternate sources of market capital in the early 1990s. "You had a massive disequilibrium of real estate capital flows," he said. "There was an oversupply in the 1980s and a correction in the 1990s. This created a capital vacuum."
Private real estate development companies that had difficulty borrowing from traditional sources began accessing equity capital by transforming to public REITs. The trickle of new REITs became a flood as declining interest rates in 1992 and 1993 jump-started the real estate market and, in turn, REIT opportunities.
However, growth has slowed this year, with 121 IPO's launched through Sept. 30, but none in October. The market value in equity REITs, which represent 85% of all REITs, has declined an average of nearly 12% during the past year.
Rising interest rates are one factor behind the slowdown. Also, there may have been too many REITs hitting the market at one time and not enough institutional investors, according to Christopher Haley, analyst for Wheat First Securities.
But he feels the industry is still fundamentally healthy and the prospects for 1995 are strong.
Mr. Lucas agrees, saying the market had been oversaturated, but will pick up again when the uncertainty over interest rates clears. "There are $5 billion to $6 billion in offerings waiting to get done. One of the key issues is when will we feel comfortable ... how high interest rates will go. It's hard to say about next year, but I expect to see market activity next year like we had in 1993," Mr. Lucas said.
The growth opportunities differ from earlier REIT minibooms, primarily because the companies themselves are different. "The new type of REIT is self-managed and self-administered. It's a perpetual company, not like the REITs in the 70s," said Edwin Sidman, chairman of Beacon Properties Corp., a Boston-based REIT.
Mr. Sidman also said today's REITs are not highly leveraged compared with their predecessors.
Daniel Lupiani, corporate senior vice president for First Chicago Bank, agrees. "The REITs in the 1970s were more like real estate finance companies than operating companies," he says. They had debt-to-equity ratios of 2 to 1 or even 3 to 1.
"Today, the development aspect of REITs is minor. Now they are investing in a portfolio of operating properties."
Mr. Nielsen writes for Medal News Service.
