“Global real-estate stock funds suffered a gut-wrenching 46.6% loss on average in the crisis of 2008, then recovered to gain nearly 37% and 17.2% in 2009 and 2010, respectively,” writes the Wall Street Journal. “Then, just as investors were catching their breath, sovereign debt issues in Europe and the U.S. led to a slowdown in commercial real-estate activity, and a 10.1% average loss for the funds in 2011. A healing economy brought another upturn in 2012 when the group rose 31.8% on average.”
But this time investors are being smarter about the share of their portfolio that they dedicate to the real estate market. It seems like most investors are choosing to allocate somewhere between 7–15%. Before, investors were dangerously overexposed, even in ways they didn’t foresee. Consumer credit looked like a different animal to investors, but it turned out to be highly correlated to real-estate debt when things go bad. When the bottom falls from the market, you can’t pay your debt, whether it’s a credit card or a mortgage. The question is just which you choose to pay first.
“In 2007 AAA corporate bonds and treasuries lost their safety for the first time in a while, but they still remain the safest place for investors,” said AmeriSave Direct Lender. “Now investors are getting interested in real estate again, which is good news overall for consumers. We should expect to see more demand for debt, which will make credit become less constrained. And an increase in equity should drive up prices, but not to the frothy levels we saw before. Remember, investors are still feeling the sting from 2007, and that’s going to take a while before it fully goes away.”
Investors typically get exposure to the real estate market through a combination of debt and both “hard” and “soft” equity investments. Hard investments occur when the investor buys property directly, either with a view to renting the property or selling it on after renovation. Soft investments happen when the investor puts money into a fund, or buys equity in a company, that itself invests in property.
For investors, soft investments offer the best opportunity to get access to the global real-estate industry. If you manage a small portfolio of less than $10 million, it’s very difficult to achieve true correlation to the global real-estate industry. One piece of commercial property in New York or Paris could account for a large chunk of your real estate holdings right away, so you can’t achieve global distribution across property types and geographies. By putting money into a larger fund, more property can be bought, your exposure is spread, and the returns can be divvied up among investors.
Image source: http://press-releases.propertyfrontiers.com/wp-content/uploads/2011/09/Istanbul-PR.jpg