[September/October 2008]
By Tara Anderson
1. What are the biggest factors impacting the real estate investment market right now?
Clearly, the slowdown in the overall U.S. economy and ongoing challenges in the credit markets are the two biggest factors impacting the real estate market currently. Rising unemployment levels, reductions in business spending and lower consumer confidence are likely to have the greatest near-term impact on shorter-term leases, such as hotels—especially with the expected reductions in airline travel routes by many of the carriers—along with self storage facilities and apartments.
Longer-term leases for office, industrial, retail and net lease properties are also likely to be impacted, although to a somewhat lesser degree in the near term.
Challenges in the credit and equity markets are a further near term hindrance restraining external growth and financing opportunities as well as making refinancing a much more time-consuming and uncertain endeavor than in prior years.
Additionally, in conjunction with the turmoil in credit markets, lower transaction levels relative to prior years have made it increasingly challenging to gauge asset valuation and demand levels.
Longer-term, however, the challenges in the financial markets may actually have a positive impact on the real estate market by restraining new development, thus helping to lessen the impact of the current downturn on existing assets. Finally, the potential for rising inflation, reduction in private equity and new pension fund investment and growing attractiveness of international and emerging market opportunities are also likely to impact the domestic real estate market going forward.
2. In your opinion, are there any advantages to investing in the REIT market that other markets do not offer?
Having previously worked as a forensic accountant, I believe one of the greatest advantages to investing in REITs is the abundance of operating and financial data they provide. Most domestic REITs publish sizable supplemental reports enabling investors and analysts to see on-going trends in business and where opportunities and risks can arise.
The dividend component of REITs is also an important point of differentiation relative to other investment options, especially for today's more total return focused investors. With increased volatility in equity markets recently, as well as general uncertainty with regard to asset pricing, it is this yield component that can often act as a stabilizing factor, restraining more aggressive pricing swings and limiting the attractiveness of large short positions over an extended duration.
3. What recommendations would you give a first time REIT investor during the current market environment?
The best advice I can give is to be patient and well-diversified with the majority of your long positions in companies with strong track records regarding operating performance and value creation for shareholders. Companies with well-positioned balance sheets also are attractive as their capital structure should enable them to take advantage of lucrative investment opportunities as they arise in the current operating environment—as well as a possible margin of safety should economic conditions deteriorate rapidly.
4. How would you advise U.S. investors looking to add a global real estate allocation to their portfolio?
As with any type of investment, maintaining a well-diversified and balanced portfolio is key. Unlike the U.S., disclosure and market agreements vary from country to country, and the same goes for REIT rules and regulations. I would recommend initial investment through a mutual or opportunity fund, allowing portfolio managers with a greater understanding of the various market dynamics and drivers to manage your investments.
For those interested in investing directly themselves, I would recommend starting with a sizable investment base in companies with a proven track record, particularly in markets that possess above-average growth potential over the next several years, such as London, which continues to build for the 2012 Summer Olympics.
