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Moody's Investors Service released the monthly Moody's/REAL Commercial Property Price Index (CPPI) this week, showing that unlevered property values increased nationwide by 1.3% in October. As is frequently true, however, the more interesting release was the "Professor's Corner" commentary provided along with it by Professor David Geltner, leader of the MIT team that developed the Moody's/REAL CPPI.

Professor Geltner has a graph showing "average property investment lifetime price performance by year of purchase and year of resale" (Exhibit 3) that is truly fascinating. If you purchased properties in 2002, 2003, 2004 or 2005, then you've earned spectacular gains (regardless of when you bought): Roughly 13% per year on average for properties bought in 2003 (the best year), and even about 9% per year for properties bought in 2005 (the tail of the "sweet spot" for buying).

If you bought properties in 2006 then you earned only about 1% per yeat (less than the cost of capital). But if you bought in 2007 or 2008 then you've "earned" spectacularly bad returns: -8% per year for properties bought in 2007, and -6% per year for properties bought in 2008. And that's on an unlevered basis: if you levered your mistakes, then your performance is spectacularly worse.

Now consider property sales rather than property acquisitions. If you sold in 2005, 2006 or 2007, you earned spectacularly good returns (regardless of when you bought): Roughly 12% per year on average. Even selling in 2008 was a good idea: The average gain on those properties was still about 8% per year even though that was the tail of the "sweet spot" for selling.

But if you sold in 2009 or 2010, you "earned" spectacularly bad returns: -2% per year on average for properties sold in 2009 and -3% per year for properties sold in 2010 - again, on an unlevered basis.

Now, compare those results with the following chart that compares net purchases and sales of properties, by year, for REITs and private real estate investment managers:

  • Publicly traded REITs were net buyers of properties during 2002, 2003, 2004 and 2005 - the "sweet spot" for buying.
  • Publicly traded REITs were net sellers of properties in 2006, 2007 and 2008 - the "sweet spot" for selling.
  • Private real estate investment managers were net sellers of properties during 2002, 2003 and 2004 - exactly when buying was the right choice, and the worst time for selling.
  • Private real estate investment managers were net buyers of properties during 2006, 2007 and 2008 - exactly when selling was the right choice, and the worst time for buying.

Click to enlarge


I can hardly think of better empirical data to explain why publicly traded equity REITs have produced total returns averaging 10.46% per year over the last 10 years and 11.35% per year over the last 20 years, while private real estate investment returns have been dismal:

  • Core private funds have returned 4.06% per year over 10 years and 4.72% per over 20 years.
  • "Value-added" private funds have returned 2.24% per year over 10 years and 3.62% per year over 20 years.
  • "Opportunistic" private funds have returned 6.31% per year over 10 years and 6.30% per year over 20 years.

Why? Because publicly traded REITs buy when they should be buying and sell when they should be selling - but private real estate investment managers sell when they should be buying, buy when they should be selling, and take home huge fees for that "service."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Author is long Vanguard REIT Index Fund and ING Real Estate Fund.

Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.

Source: Taking a Look at Real Estate Investment Performance: Vintage Year Buy / Sell Effects