Amidst this consolidation, REITs appear to be approaching a point of inflection, where market factors that have previously registered as headwinds weighing on sector prospects are now shifting to tailwinds. First, the prospect of peak interest rates eases upward pressure on property capitalization rates, placing a floor under property valuations. With REIT implied cap rates continuing to trade at a material spread to both appraisal and transaction values in the private market, the backdrop for convergence in pricing between the public and private markets should benefit REIT unit prices.
Second, BofA reports fund managers' REIT holdings are near the extreme lows of the Great Financial Crisis in 2009, at a 28 per cent net underweight. A recovery of investor sentiment should benefit REIT fund flows as managers rebalance toward historical exposures, enhancing demand and pricing for REIT securities.
Finally, as a capital-intensive sector, a recovery in credit markets will continue to drive greater transaction volume, and improve the prospect of M&A for REITs trading at discounts to their forward-looking net asset value.
Blackstone, the poster child for taking advantage of public-private arbitrage, has already announced the privatization of two listed real estate entities year-to-date: Tricon Residential Inc. (TSX/NYSE: TCN), at a 30 per cent premium to its prior closing share price, and Apartment Income REIT Corp. (NYSE: AIRC), at a 25 per cent premium to its prior closing share price, both on the NYSE.