Seven New Mutual Funds Put Focus on Real Estate
Gould, Carole, THE JOURNAL RECORD
Talk about a land rush: seven mutual funds focusing on real estate have sprung up so far in 1994, doubling the group's size.
Among them is CGM Realty, the first fund started by G. Kenneth Heebner, one of the industry's top-performing managers. Franklin Investments, Columbia, Crabbe Huson, American Capital, Evergreen and Pioneer also have new funds.
All invest in an assortment of real estate investment trusts, or REITs, which are publicly traded companies that manage portfolios of real estate investments and other real estate-related stocks, like home builders.
"You've got a number of bright people saying that real estate is an asset class that makes sense in light of a view of long-term inflation, and it's a particularly bombed-out area right now," said A. Michael Lipper, president of Lipper Analytical Services.
But, he added, "one could be cynical and say that just as we're cleaning up the last remnants of the last real estate speculation, we're starting it again."
Not so, insist the managers. They say there has been a fundamental shift in the 1990s toward securitization of real estate that makes analysis based on previous real estate cycles irrelevant.
The chief sources of real estate financing had been banks, savings and loans and insurance companies plus wealthy overseas lenders and private partnerships.
But the institutions were badly hurt in the last real estate bear market, in the late 1980s. And limited partnerships were unsound because investors had no liquidity, no control and no awareness of the underlying value of the properties; their main motive was a tax break.
REITs fared better than many of the alternatives, in part because they did not buy property at the top of the market in the 1980s.
Heebner said that because of regulatory limits and policy shifts that have severely crimped the ability of traditional lenders to make real estate loans, "investors can be true partners of real estate developers," either directly or through mutual funds.
Moreover, the 1990s look very different from the 1980s. Interest rates are low and property prices are depressed, so for REITs, the costs of doing business are low, too.
The new financing and the slow turnaround in real estate created terrific returns for the six real estate funds that existed three years ago. They rose 13.7 percent a year, on average through July, compared with an 8.8 percent average annual gain for the S P 500.
With real estate performing so well the last three years, is now the right time to buy? …