7 Risk Factors Plaguing Real Estate Investment Trusts
After examining the 10-K filings of 100 of the largest publicly traded REITs in the country, BDO's 2016 RiskFactor Report for REITs discovered 20 risks plaguing real estate investment trusts today. Here are the top seven.
1. Financial Market And Federal Reserve Uncertainty
REITs are considered high-yield investments, but the Federal Reserve's promise of a coming interest rate hike has trusts worried about the future implications an increase may have on cash flows and property values.
Economists are confident short-term rates will move this December following the presidential election, and 96% of the REITs surveyed fear the move will spur borrowing blues.
2. Industry Consolidation And Competition
As major REIT mergers and acqusitions continue to sweep the industry, 98% of the REITs surveyed are concerned about the added competition these consolidations will bring.
One example on the residential side is the $7.7B merger between Starwood Waypoint Residential Trust and Colony American Homes in January. The merger put roughly 30,000 homes under the new REIT—Colony Starwood Homes—making it the third-largest residential REIT in the industry.
3. Cybersecurity And IT Threats
Security breaches at large companies are growing increasingly prevalent, and REITs are feeling compelled to increase the security of their systems. Of the 100 REITs surveyed, 93% expressed concerns regarding security breaches.
One form of cyberthreat that grew significantly last year was Business Email Compromise, which could put REITs in risk of wire transfer fraud and cause major financial losses.
4. Tax Reform
The PATH Act (Protecting Americans from Tax Hikes Act of 2015) was enacted last December and will likely have a great impact on REITs—some changes favorable, others not.
The new law may make it more difficult for companies to maintain REIT status by satisfying all necessary compliance and reporting obligations. Nearly 70% of the REITs surveyed expressed concerns regarding a failure to maintain REIT status.
5. Foreign Investment
Foreign investors are often drawn to the saftey and prestige of US properties, particularly this year with so much global turmoil in financial markets. REITCafe finds $91.1B flowed into the US last year to purchase property, with Chinese investors alone accounting for $8.9B in 2015.
As wealthy foreigners continue to take a bigger slice of US real estate, 63% of the REITs surveyed say these investments are obstructing their ability to grow and expand in the US, citing increased risks related to operations and securing real estate as a growing problem.
6. Business Interruptions
Business interruption risks associated with natural disasters are a large concern for the 100 biggest publicly traded REITs, as was the case with Hurricane Matthew. The mass evacuation of nearly 2 million people throughout Florida, Georgia and South Carolina had a huge impact on commercial property—from retailers to new projects under construction.
Growing geopolitical tension and the increased likelihood of terrorism events in major US cities are contributing to REITs’ growing concerns. Business interruption worries are plaguing 97% of the REITs surveyed, up from the 92% of REITs that considered business interruption a top concern last year.
7. Competition From Airbnb And Other Online Entrants
Though services like Airbnb are a great benefit to guests, they've been a thorn in the hotel industry's side.
The ability to seek out information and check rates at the touch of a button is convenient for guests, and allows hotel franchisers and managers to access and anaylze data in real time. But these platforms have been known to divert business away from hotels—86% of the hotel REITs BDO surveyed said they've experienced a loss of business due to third-party internet travel companies, and the continued threat to revenue remains a top risk for REITs.
