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Investors Flocking to Safety of CRE

October 15, 2011 Leave a comment Go to comments
Commercial real estate retained its first-place rating among institutional investors in the second quarter of 2011, as investors focused on safety, stability, and cash flow in their investment holdings. This is according to a new report from the Real Estate Research Corporation (RERC) based in Chicago.
 
Although investment survey respondents slightly lowered their rating of real estate to 6.2 (on a scale of 1 to 10, with 10 being high), the rating far outpaced those for the other asset classes, including stocks with a rating of 5.2, cash at 3.8, and bonds at 3.6.
 
As described in the recently-released summer 2011 issue of the RERC Real Estate Report, “Search for Safety,” RERC’s return versus risk rating for commercial real estate overall increased to 6.1 during second quarter. This is no surprise, given the recent volatility in the stock and bond markets and respondents’ views that the return from commercial real estate easily outweighs the risk. However, it is important to note that this score is the highest that the return versus risk rating has been since the Great Recession began, and is a dramatic shift upward from the previous quarter when the rating had declined and the stock market was flying high.
 
The apartment sector is the only property type that has a higher return versus risk rating than commercial real estate overall. However, all property types have a higher rating than 5.0, which is a good indication that the returns are perceived to be greater than the risk associated with them, at least for the near term.
 
Actual returns for institutional real estate seem to support this view, with current 1-year trailing total returns at 16.7%, according to the NCREIF Property Index. This level of returns has not been seen since mid-2007—before the credit crisis and Great Recession began. With respect to dividends, the current 1-year income return is 6.4%, while the average dividend over the past 10 years is 6.9%.
 
With a few exceptions, RERC’s required going-in capitalization rates and required pre-tax yield/discount rates declined from 10 to 60 basis points during second quarter 2011, with the largest decrease noted in CBD office and regional retail mall properties. “Clearly, investors are bidding up properties as they flock to safety, thereby driving the required rates of return lower,” notes the report.
 
By  Ben Johnson  Editor/Publisher, National Real Estate Investor Magazine
 
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