By Jacob Frydman
Most of us know that timing is everything when it comes to investing. If you bought equities during the tech bubble over a decade ago, you’re investment probably hasn’t grown much over the last decade. Despite the crisis in housing market, many folks are wondering if now is the right time to get into real estate.
Some worry that the drop in real estate values over the past three years contributed to the economic downturn we have experienced and real property values will remain flat for the foreseeable future. I know it may be contrarian, but this could be the best time I’ve ever seen to get into the real estate market, especially commercial real estate.
Reputed short-seller Spruce Point Capital Management released its latest short report this week. The firm is shorting Canadian dairy and grocery manufacturer Saputo. Spruce Point chief Ben Axler believes the company is entering a phase of declining growth and highlights the financial stress and growing challenges he sees it facing, not only in Canada but Read More
The decline in prices since 2007 makes it possible to acquire good properties for considerably less than it would have cost even 3 years ago and often at below replacement cost. We are also in a historically low interest rate environment, which means financing the purchase of a building today is the cheapest it has ever been. Leverage is one of the components that make real estate so attractive and provides enormous returns on the upside.
I believe we are fast approaching a “perfect storm” for acquiring properties now. Over the next few years, several other trends will occur that make the opportunity even better. By 2013 an unprecedented number of securitized loans will be coming due, at debt levels that will be difficult, if not impossible, to refinance. That should create further buying opportunities for smart commercial real estate investors.
The global sovereign debt crisis and the sluggish economy have forced governments to take actions, such as quantitative easing, which nearly everyone agrees will eventually lead to inflation. For all these reasons, we at United Realty Partners believe we can acquire properties at great prices, finance them with low interest rate debt, improve the value of the rental stream as inflation starts to kick-in, and then dispose of the assets at higher prices towards the end of our holding period.
While stocks and bonds have their place as traditional instruments of investment, investors are increasingly looking towards alternative investments – real estate, hedge funds, private equity and commodities to engineer an overall enhanced performance of their portfolios.
Historically, real estate has been relatively un-correlated to the broader stock and bond market. Said differently, investments in real estate typically do not fluctuate based on the broader stock market, and therefore, real estate helps to diversify a portfolio. Real estate provides an investor with the opportunity to earn current cash-flow, while serving as a hedge against inflation.
Institutional investors have historically allocated a portion of their overall portfolios to direct real estate investments. In 2010 that allocation was 8.53% of their overall portfolios, but has been steadily rising as equities prove more volatile and fixed-income yields remain low. Many experts believe that investors should allocate at least 20% of their portfolios to real assets.
While most small investors do not have access to commercial real estate deals, they can invest through a well-managed Real Estate investment Trust (REIT). Choosing the right REIT can be difficult, but those that acquired property during the boom and have little capital for new investments should probably be avoided. Remember, timing is everything.
Jacob Frydman is the CEO if United Realty Partners. United Realty Partners is a privately held real estate investment and advisory firm. The firm invests in and develops real properties for its own account, joint ventures with others, provides strategic advice to clients on complex real estate transactions, and through its affiliates, sponsors and advises Real Estate Investment Trusts. For more information, visit http://www.urpa.com/.