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Brad Case

 
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  • Office Rents Stabilize but That Doesn't Mean the Pain Is Over [View article]
    Good article, Tom--and I agree with Tony that the worst is still ahead of us even if operating fundamentals are improving. Very few properties have been transacting, and that's because a huge amount of real estate was bought using huge amounts of debt at the top of the market by investment managers who were under pressure to put committed capital to work. The equity put into those investment managers is gone--completely--but they're pretending it's not so they can continue to raise capital and charge fees. Their bluff won't be called until their debts mature, which for most of them will be around 2012.
    Meanwhile, the average property value will continue to decline, because the wave of distressed sales will continue to overwhelm the smaller number of high-quality non-distressed sales. So the debts will mature into the bottom of the market, even if operating fundamentals have improved substantially by then.
    The worst has already happened, but it won't become obvious until later.
    Oct 23 11:50 AM | Likes Like |Link to Comment
  • Diversification in Pictures [View instapost]
    Good post, Nanette. Yes, there is a bunch of research from academic finance specialists showing that the benefit from diversification is very strong, but diminishes as the number of asset classes increases.
    There are four fundamental asset classes that should be in every portfolio: cash (for immediate needs), bonds (for income and low returns with low risk), stocks (for high returns), and real estate accessed through publicly traded REITs (also for high returns but with a low correlation to stocks). Domestic and international are less important than having access to those four asset classes. Cash doesn't show up in the investment portfolio allocations because it's just the portion that's not invested.
    The green portfolio is the first that has all three fundamental asset classes, which is why it's so much better than the orange portfolio. Grey and blue are only very slightly better, because they add a piece of an already existing asset class (emerging stocks) and a non-essential asset class (commodities).
    Oct 23 10:49 AM | Likes Like |Link to Comment
  • Core Satellite – A Way to Step Into Tactical Asset Allocation [View article]
    I think your overall point is valid, TomF75, but there's still tremendous value in what MyPlanIQ is doing. Correlations moved up in 2008, but they didn't go to 100%, which meant that well-diversified portfolios still did better than non-diversified ones. For example, the correlation between stocks (say, Wilshire 5000) and publicly traded domestic REITs never went above 71%. That's higher than the long-run average of around 50%, but still offers a great deal of diversification benefit.
    Oct 23 10:40 AM | 1 Like Like |Link to Comment
  • Commercial Property Prices Continue to Slump [View article]
    The Moody's/REAL CPPI release points out that there are three groups of properties. First are the high-quality properties owned by non-distressed investors such as publicly traded REITs, and their values have been going up. (Green Street Advisors agrees: according to their index, REIT-owned properties have been going up since June 2009.) Second are lower-quality properties owned by non-distressed investors, and the value of those properties hasn't changed. Third are properties owned by distressed investors, and those have continued to sink in value.
    In my opinion the overall CPPI will continue to fall because, going forward, the distressed sales will overwhelm the non-distressed ones. Investors have to understand that if they buy into a high-quality portfolio without financial distress, they're already riding an increase in property values that's likely to get stronger as operating fundamentals improve. If they buy into a lower-quality portfolio with financial distress (such as a non-traded real estate fund) they'll continue to ride the downdraft.
    Oct 23 10:34 AM | 1 Like Like |Link to Comment
  • Are Correlations Too High to Justify REIT Investments? [View article]
    The fall in asset value was very real, but REIT investors have marked it and moved on. REIT stock prices started declining in February 2007 because REIT investors understood that the economic downturn would bring down operating fundamentals, FFO, and property values. Through September 2008 REITs had lost about a quarter of their value--then, in October 2008, the liquidity crisis hit and REITs went all the way down to -68%. The liquidity crisis ended in March 2009, and REITs have regained most of the ground that they lost because of it, but they're still below where they were in September 2008.
    The values of properties held by REITs have actually been increasing for about 15 months, even as values of properties owned by other real estate investors have continued to fall.
    Thanks for your comment!
    Oct 23 10:26 AM | 1 Like Like |Link to Comment
  • Getting Real About Real Estate - An Interview With Andy Miller [View article]
    Regarding commercial real estate, while there may be exceptions, on average property values have not started to recover and I don't expect them to recover for some time. That's because non-distressed transactions will increasingly be overwhelmed by sales from distressed sellers--mainly those who bought at the top of the market using too much debt. We've seen comparatively few of those sales so far, because debt originated during 2007 won't come due until 2012. That means that the average level of property values is likely to decline (because of the increasing share of distressed sales) even if and when operating fundamentals are improving.
    Oct 22 03:39 PM | 1 Like Like |Link to Comment
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