By  on November 13, 2006

Hundreds of billions of dollars are locked up in the real estate market, and it's ready to be invested on whatever brick-and-mortar opportunity becomes available. Retail real estate is especially alluring these days, and it is being targeted not only by public real estate investment trusts, but by private equity interest, too, according to experts at the National Association of Real Estate Investment Trust's annual conference in San Francisco last week. In fact, the same institutional and private equity money salivating over retail REIT stocks also are said to be eyeing companies such as Gap Inc., Kohl's Corp. and McDonald's USA. Sources at the conference said private equity firms view these companies as ideal real estate plays that would maximize their portfolios.

And despite the retail industry's obsession with same-store sales and consumer confidence, the sector remains attractive for investors of all stripes.

"Retail real estate has nothing, nothing, nothing to do with retail sales," said Rich Moore, managing director of equity research with RBC Capital Markets. "That's especially true for the mall guys, but also the community center guys."

Retail sales, he said, are a good indicator of how rents will rise. But on the flip side, when sales are down, rental rates don't spiral downward. In fact, retail REIT values seem to grow regardless of how retailers themselves are performing, at least on a short-term basis.

Given the universal desire by investors to absorb more retail real estate, analysts and executives at the conference were buzzing over who would be the next takeover target. Some whispered that Kite Realty Group Trust, a $524 million shopping center REIT that went public just a few years ago, might be snapped up by Kimco Realty or Developers Diversified Realty, neither of whose acquisition appetite seems to be sated by recent multibillion-dollar deals. In the shopping center and strip-mall market, where sheer mass is a key indicator of strength, another scenario for Kite may to be merge with the similarly sized Ramco-Gershenson Properties.

"As a sector, the retail REITs are the most attractive out of any asset class from an M&A standpoint," said David Aubochon, vice president of securities research with AG Edwards. "It could be public money, or Australian, European or Middle Eastern capital. But five years from now, there will be 25 to 30 percent less retail REITs than there are today."

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