REITs own New York. But who owns the REITs?

UPDATED: Friday, March 31 at 4:48 p.m.: We live in the age of real estate investment trusts. Seemingly every year, another storied New York property company makes the step from private to public. In February, David Bistricer’s Clipper Equity became the latest, joining the likes of SL Green Realty, Vornado Realty Trust, Boston Properties, Empire State Realty Trust and many others by listing shares on a stock exchange.

These trusts now own a big chunk of Manhattan. Except they ultimately don’t really own them — their shareholders do. Who they are, few seem to know or care. But it matters. Anyone who has ever listened to a REIT’s earnings call will know that executives obsess over shareholders. Their approval determines a REIT’s market value and ultimately its ability to raise money and buy more properties.

Last year, REITs became their own index within the S&P 500. That matters because of how the investment fund industry works. Firms like Vanguard or BlackRock run enormous index funds, or funds that track the performance of a certain stock index based on algorithms. Unlike, say, hedge funds, computers make the decision to buy or sell, not humans. REITs becoming their own index opened the door for financial firms to create REIT index funds.

John Kim, an analyst at BMO Capital Markets, said he has noticed an inflow of capital into REIT-specific passive funds. “Part of it may be coming out of the financial exchange traded funds (where REITs were previously grouped), it may not necessarily be that much new capital,” he said.

Based on data from research firm Morningstar, The Real Deal ranked the major shareholders in four major New York-centric office REITs as of year end 2016: SL Green, Vornado, Boston Properties and Empire State Realty Trust.

A less noticed side effect of the spread of REITs is that it has changed the type of money that flows into Manhattan’s skyscrapers. Whereas the old real estate dynasties often relied on their family wealth or institutional partners like pension or sovereign wealth funds for equity, the biggest REIT shareholders are mostly stock investment funds, many of them passively managed. But some major REIT shareholders, for example the Qatar Investment Authority and Norges Bank Investment Management, have also partnered with New York developers in the private markets.

Here are some of the most notable REIT shareholders:

The Vanguard Group

With around $4 trillion in assets under management, the Vanguard Group is one of the largest financial firms in the world. And Vanguard’s REIT investments live up to its size. The Pennsylvania-based firm, which pioneered passive funds, is the single largest shareholder in SL Green, holding 17.3 percent of its stock, Boston Properties (14.2 percent) and Vornado (12.7 percent) — each by a margin. And only the Qatar Investment Authority holds more shares in Empire State Realty Trust than Vanguard. Most of Vanguard’s investments are made through so-called exchange traded funds — passive funds that track a stock index and can in turn be bought or sold like stocks. Vanguard manages by far the largest U.S. ETF that invests solely in REITs, the Vanguard REIT Index Investor, which has $64.8 billion in assets, according to Morningstar. It also invests in REITs through funds that track the S&P 500 and other stock market indices. All told, Vanguard funds own more than $7 billion worth of shares in the four REITs alone.

BlackRock

With more than $5 trillion in assets under management as of October, BlackRock is perhaps the only asset manager that can match Vanguard’s heft.  The company hasn’t invested nearly as much money in major REITs as Vanguard, but it appears to be bullish on the sector. “We see U.S. commercial real estate delivering attractive total returns over the next few years in a low-return world,” BlackRock’s global chief investment strategist Richard Turnill wrote in a note on the company website last week. “We like selected publicly traded U.S. real estate investment trusts and commercial mortgage-backed securities.” Still, with $4.67 billion in assets, its iShares U.S. Real Estate fund is a comparatively minor player compared to Vanguard’s REIT fund. The Manhattan-based company, founded by Larry Fink almost 30 years ago, is set to move from its Midtown East home to Hudson Yards in 2022.

Qatar Investment Authority

Unlike Vanguard and BlackRock [TRDataCustom], Qatar’s sovereign wealth fund isn’t known as a big REIT investor. Like other sovereign wealth funds, it has preferred partnering with New York developers in private markets. The fund, which reportedly has more than $335 billion in assets under management, bought $3.78 billion worth of Manhattan real estate over the past years, according to Real Capital Analytics, including a stake in Brookfield’s megaproject Manhattan West. But in October it broke with that private-market tradition when it bought shares in Empire State Realty Trust for $622 million — a 9.9 percent stake. The move was highly unusual, and not just because it made QIA the single biggest government-owned shareholder in a major New York REIT. Rather than buy shares in public markets, which would have driven up their price, the fund reached a deal with Empire State’s management to issue new shares through a capital raise. The deal allowed it to effectively buy a stake in New York’s most famous tower, the Empire State Building.

QIA is headed by Sheikh Abdullah bin Mohammed bin Saud Al Thani, a member of Qatar’s royal family. The fund made its first big splash in the Big Apple in 2008, when it partnered with Boston Properties and Kuwait’s Sovereign Wealth Fund to buy the GM Building.

“There isn’t a developer or someone who needs money in New York who doesn’t go through those doors,” Corcoran Group’s CEO Pamela Liebman told TRD in September. Speaking of Abdullah bin Mohammed, she added: “When everyone sits in the room with him, he’s the king, literally. He sits down, and they sit down. When he speaks, no one contradicts him. There’s a respect thing.”

Daiwa Securities

You thought the Japanese stopped being big players in the New York real estate market in the 1990s? Think again. Tokyo-based investment bank Daiwa Securities is a major shareholder in several U.S. REITs, holding 4.53 percent of SL Green’s and 1.96 percent of Empire State Realty Trust’s shares. The company was officially formed in the middle of World War II, in 1943, but traces its roots to the launch of Fujimoto Bill Broker Bank in 1902. It launched its New York subsidiary, Daiwa Capital Markets America, in 1964 and currently has an office at 32 Old Slip in the Financial District.

State Street

State Street Corp. ranks among the three biggest shareholders of SL Green, Vornado and Boston Properties. Founded in 1792, the Boston-based holding company is one of the oldest U.S. financial services firms. It didn’t just invest in REITs. Last year, State Street took over $3.6 billion worth of real estate assets when it bought General Electric’s investment management business for $485 million.

Correction: A prior version of this story reported BlackRock’s assets under management at over $5 billion; it’s $5 trillion.