Investors Take Shelter in Commercial Real Estate

By Tautin, Mary | Global Finance, June 2001 | Go to article overview

Investors Take Shelter in Commercial Real Estate


Tautin, Mary, Global Finance


Real estate investment trusts are rising in favor among institutional investors seeking to hedge returns in a volatile environment . By Mary Tautin

Of the mean investment return rates reported in 2000, those belonging to commercial real estate sit comfortably in the middle; for investors, mediocrity never felt so good. Real estate investment trusts (REITs) and commercial mortgage-backed securities (CMBS) are among the favored investment vehicles.

While mean REIT returns trailed the S&P 500, Nasdaq, and utilities stocks through the end of 2000, they provided superior risk-adjusted returns when investment markets were volatile, says Kenneth T Rosen, author of a paper released by Berkely-based Lend Lease Rosen Securities in April. In addition, REITs exceeded private real estate, international stocks, bonds, and small-cap stocks by up to 4%.

In real terms US REIT share prices have stalled since mid2000, according to Steve Sakwa, a real estate analyst at Men fill Lynch, in NewYork."The investors still want growth, not preservation of capital. Last year the growth was unbridled. They collapsed and people still want to make up for that," says Ron Sturznegger, the managing director and head of real estate and lodging, at Bank ofAmerica, in San Francisco.

Jack Barthell, head of the real estate capital markets practice at PricewaterhouseCoopers in NewYork, says this may be attributable to investors' first-quarter hopes for multiple interest rate drops, which in combination with sated capital needs may have slowed investing.

"More than any time in the recent past, real estate compares favorably with other public institutional investment options," says Jon Lang, senior director of financial services at Cushman & Wakefield in New York. According to Lang, Wall Street securities analysts continue to maintain return targets of 10-15%, which promises to outperform the general stock market."People are looking at overall returns and saying at worst it's a haven and at best a source of returns," he says.

Predictions for stable returns are rooted in a stable market, one in which access to market information-a relatively recent phenomenon spurred by the collapse of real estate returns a decade ago-informs both buyer and seller alike. "Real estate markets are pretty stable because people are immediately incorporating information into the pricing of the REIT shares, says Barthell.

Demand-led development has also contributed to market stability."We're not facing any of the overbuilding problems faced in the last big recession," says Lang.

Jerry Barag, chief investment officer of Lend Lease Real Estate Investments in Atlanta, concurs, citing a decline in construction levels over the past 18 months. While Barag admits that softening demand and falling rents may typify areas undergoing economic correction, such as Silicon Valley, he concludes that market fundamentals are strong.

Despite a relatively stable real estate market, consolidation continue in both the REIT and CMBS markets.And international adaptation of the REIT structure is ongoing.

REITs, publicly traded companies that buy real estate and

pay out almost everything they earn to shareholders, have been an alternative investment vehicle in the United States for 40 years. But according to Barag, the market has proven too small to support the initial proliferation of REIT cornpanies."We've seen some of the big REITs go back to getting secured mortgage debts for the last 18 months because they really aren't able to raise equity;" says Jon Vaccaro, head of CMBS at Deutsche Bank in New York. …

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