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  • What's Wrong With Capital Appreciation in Core Real Estate? [View article]
    I understand your point, ConsiderBothSides: capital appreciation of a property is not the same as capital appreciation of a share of ownership in a company that owns properties. Still, from an investor's point of view, there are two ways to benefit from an investment: income and capital appreciation. Those investors who accessed the real estate asset class through core funds got income but no capital appreciation, while those investors who accessed the same real estate asset class through publicly traded REITs got essentially the same income PLUS significant capital appreciation.
    The implication is that core funds are in the business of watching properties deteriorate while they throw off income, while publicly traded REITs are in the business of generating capital appreciation from their properties while enjoying essentially the same income.
    Oct 27, 2010. 08:18 PM | Likes Like |Link to Comment
  • What's Wrong With Capital Appreciation in Core Real Estate? [View article]
    Thanks for your comment, Chieftains. (The musical group, I assume?)
    Unfortunately you must be a NCREIF member to access the data--but if you're affiliated either with a large pension fund that is a NCREIF member or with one of their real estate investment managers, that may give you the access you need. Or you could ask someone else who has access to the data to verify the result.
    As to your first question, there's actually no methodology: the ODCE (open-ended diversified core equity) fund index provides gross and net returns, total as well as separated into income and capital appreciation components. The income index now is the same (within rounding error) as it was in 1977Q4, when the index was introduced.
    I should point out that, according to ODCE, fees and expenses of core funds are paid purely out of capital appreciation, not out of income. That is, gross income and net income are identical.
    Oct 27, 2010. 08:13 PM | Likes Like |Link to Comment
  • What's Wrong With Capital Appreciation in Core Real Estate? [View article]
    Thanks for your comment, ConsiderBothSides. Actually, I don't ever want to suggest that REIT executives are smarter than the rest of the industry--in fact, I think it's much more likely that transparency, liquidity, investor-oriented governance, and other differences between the REIT business model and the private fund business model account for the difference, rather than any difference in smarts. I'll post other blogs on those business model differences.

    I don't think it's likely that other return streams explain the difference, since any other return streams would also be included in each REIT's dividend and therefore be included in its income return rather than its capital appreciation. Besides, even at their peak, those three companies accounted for only about one-twelfth of the total industry.

    Finally, for pension funds and other institutional investors I don't advocate investing 100% through REITs. In two other articles I report on research that suggests holding something like one-third in REITs, one-third in core fund investments, and one-third in opportunistic fund investments. That's because, even though all three invest in the same real estate assets, their returns happen on a different schedule, which means that investors who hold all three can benefit from diversification.
    Oct 25, 2010. 03:00 PM | Likes Like |Link to Comment
  • What's Wrong With Capital Appreciation in Core Real Estate? [View article]
    Yes, ssg13565, I've plotted the gains and losses over time, and what's shocking is that private real estate investments (meaning those not made through publicly traded REITs) have never provided very much capital appreciation except in the few years of the bubble. Even at the highest peak of the bubble, capital appreciation was unbelievably low: as of 2008Q2 (the high point), for example, core funds showed capital appreciation averaging just 0.80% per year over the previous 20 years. For publicly traded REITs, though, the capital appreciation averaged 5.39% per year.

    That means it's not just a matter of the endpoints. The truth is, capital appreciation in real estate has taken place--but the managers of private real estate investment funds have missed it completely.
    Oct 25, 2010. 08:48 AM | Likes Like |Link to Comment
  • Are Correlations Too High to Justify REIT Investments? [View article]
    You're right, Malach--and, in my opinion, fundamentals are exactly why REIT stocks have increased so strongly. REITs started their downturn in February 2007, not because fundamentals were already bad, but because investors expected them to get bad. Then, in October 2008, something else happened: the liquidity crisis, which caused investors to fear that REITs might not be able to repay their mortgage loans at maturity. That crisis ended in March 2009, yet REITs are not yet back to where they were before it started. Meanwhile, investors are looking forward to strong earnings growth for REITs--partly from improved operating income when fundamentals improve, and partly from the opportunity to buy good properties at good prices from distressed sellers.
    That disconnect between REITs and the private side (meaning not traded on any exchange) of the real estate market is likely to persist, to the advantage of REIT investors.
    Oct 24, 2010. 10:06 AM | Likes Like |Link to Comment
  • 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, 2010. 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, 2010. 10:49 AM | Likes Like |Link to Comment
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