LOS ANGELES - On the heels of last year's privatization of some of the largest public real estate investment trusts, the strong flow of equity capital into real estate will continue in 2007 - but in a different direction, according to Stan Ross, chairman of the board of the University of Southern California Lusk Center for Real Estate.
In his 2007 Forecast, Ross said some investors who previously had been targeting public REITs will shift to smaller private equity funds and hedge funds as well as limited partnerships, joint ventures and direct investments in niche properties.
"Shareholders who received attractive payouts when the REITs were acquired are reinvesting some of that capital directly into real estate," Ross said. "Although prices have increased on investment-grade properties, investors can realize competitive returns on second-tier properties, depending, as always, on the location."
He added that leading metropolitan markets such as New York and Los Angeles will continue to draw investment at the higher prices. Capital will continue to flow into traditional office, retail, industrial and hotel assets, but alternative investments including urban infill, adaptive reuse and multifamily/retail development near inner-city transit centers will draw more interest.
Despite the recent trend toward privatization, Ross said public REITs would remain a magnet for institutional capital.
"For the past five years, REITs have outperformed the stock market," Ross said. "So we can expect more public offerings this year."
Ross added that the continued availability of relatively low-cost debt capital will enable investors to acquire more properties and potentially realize higher returns.
"In sum, the broad and deep market for property investment has demonstrated that real estate will continue its dominance as an asset class in 2007," he said.