Magazine article Real Estate Issues

Real Estate Capital Flows: The Money Trail

Magazine article Real Estate Issues

Real Estate Capital Flows: The Money Trail

Article excerpt

The pulse is racing for real estate-especially as measured in the public markets. Investable real estate is profoundly being redefined, from both a source of capital and the type of property chosen.

ne clear message resonates from the 1980s: real estate has to stay connected to the capital markets. The overbuilding of the 1980s sent the clear message that the capital markets (pricing of risk and the allocation of money) had become de-coupled from the spatial markets (fundamentals of supply and demand for space). For real estate to be classified as a mainstream investment in the aftermath of the deepest market corrections of the century, the asset class had to behave much more within the rules of other capital markets. However, it continues to struggle due to the lack of readily available information, as well as other arbitrage opportunities in the market, yet real estate will continue to access better information at a more rapid pace. Keep in mind however, that no investment market ever has perfect information. Developing a real estate strategy requires implementing investment models that are built on a mosaic of information regarding property types, market fundamentals, and capital flows. The purpose of this article is to provide an intellectual understanding of sizing up capital flows and how following the money trail can improve the understanding of the past, present and future of the real estate market.

Real estate is here, there, and everywhere! Tell me there is not a problem with adding up the nation's sticks and bricks and applying a market value! Guess again. Even in today's information age, where companies know more about us than we know about ourselves-spending habits, car and phone usage, bank account balances, etc.-there is just too much real estate. Yet solid studies of the capital composition and size of the real estate market continue to be generated. These studies have dissected real estate into institutional and non-institutional, debt and equity, property type, and by type of investor. To satisfy the capital pie quest, the two perspectives have developed and focus on either: a). space and/or inventory, or on b). the source of investor capital. For the most part, capital flow analyses have focused on the inventory side or space analyses instead of counting up investors' equity and debt holdings of real estate. The market's ability to follow the money trail has only begun over the past decade and has had dramatic improvements; however, currently, no one can totally account for the ever-changing capital flows into the industry.

ESTIMATING THE SIZE OF THE U.S. REAL ESTATE MARKET PORTFOLIO

The first generation of real estate capital analyses dealt with the size of the investment real estate market, focusing on real estate type and location of investment grade real estate. Generally, the studies were not particularly concerned with the sources of capital by investor. Meg Parker Holden completed a synthesis of capital studies and provided further analysis of the real estate universe.l This 1993 article, entitled The Nation's Portfolio of InstitutionalGrade Real Estate, attempted to determine the nation's investment universe for commercial real estate. This article appropriately points out that knowing the size of the real estate investment market provides one of the starting points in the process of portfolio decision-making. In order to make accurate judgments on what types of property and where to buy, one must know what is available and where. Knowing the 'size of the pie' also enables portfolio analysts to make more accurate comparisons and allows investors to adjust their portfolios to more accurately fit their investment desires. A more academic reason for determining the portfolio is that it allows testing of portfolio theories, such as modern portfolio theory and portfolio diversification, as they relate to real estate. As a backdrop in exploring the real estate universe, the following table (Exhibit 1), provides a summary of this study and others that have guided the industry insights into this world. …

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