Part 1 of 2
2017 is leaving a string of broken stock market records in its wake, but REITs have seen more modest boosts in performance. That is according to the 2017 BDO RiskFactor Report for REITs.
According to the report, REITs registered 3.41% annual growth in early-June, compared to the broader S&P 500’s 9.91 gains. According to the report, competition for assets at lucrative prices, the anticipation of tax reform and the likely drumbeat of interest rate hikes rank high on REITs’ risk radar.
“The top 100 REITs unanimously cite access to capital, financing and liquidity as a risk to their business, up from 96% in 2016 and 93% in 2014,” says the report. “REITs are bracing for the impact of multiple interest rate increases, which REITs worry could lead to restricted access to equity and more expensive debt in the long term.”
Stuart Eisenberg, partner and national leader of BDO’s real estate and construction practice says that “After enjoying several years of growth following the economic crisis, investors are beginning to take a more cautious approach. 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.”
The BDO report also includes that technology risk has been a persistent thorn in REITs’ sides. “From an operational perspective, REITs’ reliance on their information systems and technology has grown significantly. Ensuring the right systems are in place and keeping them in working order are top priorities in 2017.”
And nearly 72% cite operational risks associated with the implementation and maintenance of technology and systems, up from 43% in 2014. “More than 9 in 10 REITs (92%) identify cybersecurity as a threat in their disclosures, up from just 25% in 2012,” the report says.
Another key finding in the report is that with the growth of the sharing economy, the name of the game has become instant gratification: Space sharing and growing demand for shorter-term commitments are shaping the future for the retail, hospitality, office, apartment and timeshare sectors. The report says that “80% of REITs point to the sharing economy and the proliferation of online rental platforms, such as Airbnb, HomeAway and VRBO, as a threat.” And the report says that 80% cite the growing popularity of third-party Internet intermediaries, like TripAdvisor, as a risk to their business—primarily as a barrier to maintaining strong brand loyalty. And “73% cite loss of franchise license.”
Check back in the next few days for more on the report, specifically as it pertains to accounting and revenue recognition.