While there are many other economic obstacles for REITs to overcome, the political uncertainty reported this year demonstrates that they are approaching their financial projections with caution over administration policies. Other factors include tax policy changes, fluctuating interest rates, and increased borrowing costs. All 100 REITs reported that among their top concern was economic conditions that could result in less access to capital and reduced liquidity in the marketplace.
The Trump administration has been working hard to pass tax reform before the end of the year, with the elimination of the alternative minimum tax and possible removal of 1031 exchanges on the drawing board. The policy shift may impact certain rules related to REIT’s tax status and result in lowered income projections for public REITs. Over 95% of REITs reported in their 10-K filings that they show concern over the risk tax laws and interest rates pose to their investment model.
Executive Branch policy decisions are not the only things that worry REIT managers. The report also points to concerns over portfolio diversity, with 72% citing geographic concentration as posing a significant risk to their portfolios. That is up 12 points from last year’s report.
Another 56% also cite international competition as an impediment to U.S. market expansion, yet that number is down from 63 percent posted last year. Although the report indicates that some REITs are hinting at expanding their portfolios internationally, regulatory issues, Brexit, and other global policy shifts could make that expansion risky.
As the U.S. economy continues to improve and stock market climbs to record highs, it adds more uncertainty within a REIT market that competes with other equities that may not be as directly impacted by political policy decisions. Investors have been enjoying several years of growth following the recession, leading many institutional investors to take a cautious approach, recognizing the risk of a possible correction in the markets.
Stuart Eisenberg, Partner and National Leader of BDO’s Real Estate and Construction practice said in a statement, “A potential slowdown in the market, combined with concerns of rising interest rates, a lack of continued access to capital, and disruptions in several REIT sectors, has added to the uncertainty.”
“For REITs navigating the current economic environment, there is a real possibility this confluence of factors may result in slower growth,” he added.
You can view a copy of the 2017 BDO RiskFactor Report for REITs by clicking here.
