The later half of this year has been ruled by the IPOs. News has been created and historic records broken on Wall Street this year by IPOs from all segment of business. Just a few days back the world was taken by surprise when the Chinese ecommerce company launched its IPO and broke all records and it was no fluke since the company is still performing above it launch price and showing steady upside indications. Last Wednesday it was another company, A U.S. office landlord Paramount Group (PGRE, Financial) again rewrote history by breaking the records of fund raising in its sector.
The new IPO
As expected by the street Paramount Group, a U.S. office landlord company launched their IPO last Wednesday and raised $2.29 billion making it the largest IPO ever for a U.S. REIT and broke the previous record in its segment which was held by Douglas Emmett Inc. (DEI, Financial) a multifamily/office landlord that raised $1.59 billion in 2006. Something that is unique is that the previous record was built in 2006 just before the recession set in and the market was at its all-time high. Real estate was booming at that point of time and the U.S. economy was at its peak. But the recession changed the whole picture and the hardest hit was the banking and the real estate sector. Right now the economy is still in recovery mode and has gained a degree of stability; the peak is yet a long way to go. Paramount group broke the record and achieved the milestone fund raising in the recovery period when investors are extra cautious than what they were in 2006 before the recession. This speaks a lot about the quality of asset Paramount group holds in its kitty to lure more investors than its peers. The New York-based Paramount Group's offering comprised 131 million shares, initially priced at $17.50 each. Let us take a look at the addresses that Paramount Group own and understand the prospects they offer for their investors.
In addition to the fact that investors are pretty bullish on real estate in 2014, we must consider the fact that Paramount holds some of the choicest office real estate in the best markets in the United States. Let us take a stock of the company's portfolio of public assets which does not include the list of assets it manages for non-public funds:
New York City:
- 31 West 52nd Street
- 712 Fifth Avenue
- 900 Third Avenue
- 1301 Avenue of the Americas
- 1325 Avenue of the Americas
- 1633 Broadway
Washington, D.C.:
- 425 Eye Street
- 1899 Pennsylvania Avenue
- 2099 Pennsylvania Avenue
- Liberty Place
- Waterview
San Francisco:
- One Market Plaza
Real estate sector on the rise
The company's publicly traded portfolio is made up of only a dozen office properties –Â not a great number for a REIT of such value. But the noteworthy point is not the quantitative aspect but the qualitative aspect of the properties. Having trophy high-rises in three of the most desirable office locations in the country particularly San Francisco and Manhattan, where rents are tending upwards rapidly owing to the recent boom in the technology sector and finance industry. Going by Bloomberg reports Paramount Groups. Property house prized tenants like Bank of America (BAC, Financial) and Barclays Plc. (BCS, Financial).
Bloomberg remarked this IPO success run as not just Paramount Groups' success but the indication of improvement of the whole REIT sector.
In 20 years, the market capitalization of REITs has surged to about $816 billion from $44 billion, and will likely continue rising, according to PricewaterhouseCoopers LLP.
This is a positive sign for the economy as a whole. If we go back to the basics, the start of any business happens with space. In the face of rising rental values when the demand for space is still on the rise, it means the rental affordability factor is not causing any hindrance for the other businesses and they are capable to keep pace with the rise in rentals which indicates that the economy is not just recovering but also growing back at a rapid pace. The other bright part is that even investors are maturing over a period of time by taking increased interest in real estate sector thus adding depth to their portfolio.
With the success run of the Paramount Group IPO another major breakthrough for the overall REIT industry was the announcement that the S&P would separate REITs and commercial real estate from its "financials" category and make them a different sector of investment so that investors can get better insight into the sector thereby legitimizing an asset class that, despite its labeling as an "alternative asset class," has been able to earn a considerable portion of investor’s portfolios holding and is fast gaining mainstream focus from investors.
Analyst outlook
Though Paramount IPO does indicate the uptrend in the REIT sector which is rapidly gaining strength, yet it would be unfair to judge the whole office real estate sector across the country. The collections of Paramount Groups’ address portfolio are located in the three unique, top-tier markets with very unusual dynamics. These addresses are the most sought after by corporates across the globe but this is yet not the scenario in other locations such as Philadelphia or Atlanta.
From an investor’s point of view, it would be great to add Paramount Groups in your holdings and perhaps you can add a considerable portion in your investment portfolio from the REIT sector now that it will have its own indices. But again seeing the success story of this IPO an investor should not generalize and put money in other companies from the same sector if they do not have premium addresses in their company portfolio. The sector will certainly grow in the long run but it is not yet time to make a value investment if the property holdings are not in the premium category.
