Why Development Trumps Acquisitions in Our Real Estate Portfolios

One of the trends affecting real estate markets this year is the increasing difficulty commercial real estate companies are facing as they seek to complete potential acquisitions. Strengthening commercial real estate fundamentals, coupled with the low cost of financing, have resulted in a large increase in the number of bidders for assets in the past several quarters. In some cases, public real estate companies must compete against other buyers that may have a lower cost of capital. This trend has been most pronounced in the US and other developed countries.

In light of this trend, we believe that commercial real estate companies that traditionally have relied on acquisitions to drive growth are at somewhat of a disadvantage to those companies with better internal growth prospects. The former category includes many companies in the health care, triple net leases and diversified REIT sectors, and it explains why our portfolio is underweight such companies and sectors. We see such companies, which may be acquiring properties at potentially higher prices due to the current market environment, as less likely to generate growth and create value for investors going forward.

Instead, we favor development-focused REITs that can drive growth and create value internally by using their capital and management expertise to develop new properties or to redevelop existing properties. We’ve actually increased our holdings of such companies in recent quarters. We look not only for development-focused companies; we also carefully examine the types of development projects in which they are engaged and the outlook for the markets in which they are active. We believe these companies, if they manage their development and redevelopment activities well, are likely to have higher growth rates and create greater value for investors than companies that simply own and manage their own real estate portfolios or companies that acquire properties from competitors.

While the market is not fully rewarding our viewpoint today, we think that in time it will. When it does, we believe the types of REITs we favor are likely to enjoy positive relative performance.

AvalonBay is a portfolio holding that we believe is particularly attractive in terms of its growth prospects and its ability to create value for investors. (AvalonBay accounted for 5.89% of Invesco Real Estate Fund, 2.00% of Invesco Global Real Estate Income Fund, 3.68% of Invesco Global Real Estate Fund and 3.51% of Invesco V.I. Global Real Estate Fund as of June 30, 2014.) The company’s development pipeline has increased in size, and the returns from this pipeline have exceeded analysts’ expectations. Moreover, the company is able to create long-term value by delivering new projects at this point in the cycle, and AvalonBay is among our favorite sources of earnings growth and value creation.

We continue to favor companies with better internal growth prospects, superior development and redevelopment capabilities, and better balance sheets. We believe such companies are likely to be rewarded over time, and that’s why the portfolio continues to be concentrated in these better ideas.

Important Information

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.


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