Property Grunt

Monday, January 09, 2006

The last laugh

It seems the market continues to defy gravity despite warnings from the experts and the New York Times puts in their two cents with their article Warning: Beware of Warnings About Real Estate.

Vivian Marino presents a pretty strong case for why real estate is pretty much the investment vehicle of choice for fund managers.

These include the following:

Still, the overall case for real estate remains strong. As the economy continues to grow and to generate jobs, demand for properties like apartment buildings, retail stores and office space will only rise, said Martin Cohen, co-chairman and co-chief executive of Cohen & Steers, whose Cohen & Steers Realty Shares fund was near the top of last year's performance list, returning 14.9 percent.

Indeed, last year started precariously. The funds lost 6.4 percent, on average, in the first quarter amid profit-taking by institutional investors. They recovered in the second quarter, with a robust average gain of 13.2 percent, though the third-quarter return was much smaller, at 3.2 percent. The funds were up 2.6 percent, on average, in the last three months.

REAL estate funds have been resilient partly because there has not been a major spike in long-term interest rates, which can prompt a sell-off in real estate investments, Mr. McNeela said.

The funds have also benefited from the limited supply of commercial buildings being developed.

"On average, the replacement costs continue to go up," said Theodore R. Bigman, who manages Morgan Stanley real estate funds, referring to the rising cost of essentials like building materials and land. That may also help to explain the higher-than-usual number of takeovers of REIT's last year - eight completed, six pending - from companies looking for an efficient way to expand their real estate portfolios without having to build, he added.

"We feel very glad about the limited amount of cranes in the sky producing buildings in the United States," Mr. Bigman said.

However things are not all happiness and sunshine.

We're bullish on energy prices," he said. And housing? "I believe mortgage financing has become too liberal, which has lead to rising speculations," he said. "People are buying more home than they can finance."

In other words: he thinks that there is a housing bubble.

Other fund managers would agree that some markets - particularly parts of Florida, California and Nevada, for example - have become overheated and overbuilt, but they caution investors not to confuse them with the commercial market.

"They are looking at the bubble in residential real estate, in single-family homes and condos, and translating that to a bubble in other parts of real estate," Mr. Cohen said. "They are unrelated."

Mr. Bigman concurred: "Is there a bubble in commercial real estate? We would argue that there isn't."

But he had this to say to those investors who might have been left behind in the real estate fund rally: "We're sorry you missed the best run-up that we had in years, and we strongly discourage you from expecting comparable returns. However, having a meaningful allocation still makes sense."

I still stand by my bearish stance regarding real estate particularly with Wall Street.

All these invesment banking institutions have been around for years. They have teams of the best brightest enconmists, analysts, researchers and staticians that with their combined brain power and experiences could probably destabilize the economies of several third world countries.

Which is probably why they have been so successful in navigating this noreaster of a market. Do not mistake their success that can be replicated on your own. Unless you have their resources and abilities I would advise everyone to be very careful.