Investors do not seem to be feeling real estate investment trusts these days, but they still love private real estate funds.
REITs are trading at a 16.4 percent discount relative to their assets, which is one of the biggest gaps ever outside of recessions, according to Green Street Advisors data cited by the Wall Street Journal.
Investors are much keener on private real estate funds that do not trade on the market, putting $71 billion into funds that closed last year, according to data from Preqin. Such firms had $1.2 trillion in real estate assets as of the end of 2016.
Two factors are driving this market oddity. Rising interest rates have caused investors to sell REITs, and they have been putting money into other investments that they think will do better than public markets, such as private equity and hedge funds.
They likely see private funds as less of a risk, as their values are less volatile than the stock market. REIT managers are also not likely to sell properties to close the gap, although some activist investors are working to force this to happen, notably at Forest City Realty Trust.
Third Avenue Real Estate Value Fund managers Jason Wolf and Ryan Dobratz recently wrote a letter encouraging REITs to consider becoming standard corporations to take advantage of the new lower corporate tax rate and maximize their shareholder value. [WSJ] – Eddie Small