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Executive Summary. In this report, we examine the joint ownership of properties held by public real estate investment trusts (REITs). We used a detailed property database of real estate firms maintained by SNL Securities, which included more than 18,600 properties owned or partly owned by 171 firms. The findings indicate that rather than reducing the use of joint-venture partners, REITs have increased their use at the property level in recent years. The portion of properties held under joint-venture structures has grown from 11.7% at yearend 1998 to 13.7% at year-end 2002, representing a 30% increase in the number of properties held jointly.
Introduction
A new rule concerning the accounting treatment of joint ventures has spurred curiosity about the magnitude and nature of these ventures among real estate investment firms.1 Basic questions have been difficult to answer. For example: What portion of real estate portfolios is held in joint ventures? Is the use of joint ventures increasing or decreasing? What kinds of properties are held in joint ventures?
In this report, we attempt to answer these questions from one perspective: the joint ownership of properties held by public real estate investment trusts (REITs). To do this, we have utilized a detailed property database of real estate firms maintained by SNL Securities. At year-end 2002, the database included more than 18,600 properties owned or partly owned by 171 firms.
At year-end 2002, REITs and their partners jointly held about 13.7% of all REIT properties by number and 12.5% by market value. Moreover, since 1998, the size of these business segments has increased two to three times faster than total assets. Approximately 24% of properties acquired by REITs in 2002 were joint ventures.
Rationale for Joint Ventures
Generally, two firms form a joint venture when both can benefit from an enterprise that exploits their complementary strengths, offsets individual weaknesses, creates economies of scale or concentrates market power. For example, a REIT can join with a developer to provide long-term investment capital for a new property, thus acquiring a new asset without competitive market bidding. Or a REIT with a conservative risk strategy could venture with a partner executing an opportunistic strategy. The venture can acquire risky properties, or increase risk by using leverage, while allocating the appropriate...