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Wharton Emeritus Professor Dr. Peter Linneman tells us why and how.
BRUCE KIRSCH: REITs came on to the scene in around 1960. Is the real estate business in the US better off for the existence of REITs?
DR PETER LINNEMAN: Oh, I think it’s massively better off, in two ways. One it has provided an alternative source of capital, and as we’ve talked about, and the book talks about, real estate’s a capital intensive business. And therefore even just getting your capital a little bit cheaper goes a long way. It’s just like if you’re in the manufacturing of steel products. Shaving a little penny off of every ton you produce adds up if you’re doing tens of billions of tons a year. Real estate’s about mounds and mounds of capital, and having REITs has opened up an extra source because of its tax transparency. You add to that the public market side of it, and if you said, is real estate better off for having public companies, the answer is by far. Yes, you’ve gotten cheaper capital access.
The other thing is, back to what we’re talking about a while back on private equity, the public companies, most of which are REIT, have just set a different standard on transparency. And transparency is a funny thing, the industry benefits from it far more than any single company benefits from their own transparency. In that if you’re in a business where things are transparent, people are more willing to put capital in, they’re more willing to trust, they’re more willing. And the thing that the public market has done, in the last 20 years especially, is bring a high level of answerability and transparency to a large amount of the capital going to real estate. And it’s not just brought accountability for the money that’s in those REITs, it’s brought it to the industry as a whole because private equity has to compete with REITs to get money. Private REITs have to compete with public REITs to get money, and it just goes on and on. And therefore, the transparency, as well as the extra pool of capital have greatly benefited the industry.