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Portfolio > Alternative Investments > Real Estate

Real Progress

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Advisors have heard quite a bit about the stellar performance of real estate investment trusts last year; they’ve also been hit with a slew of facts and figures meant to increase the acceptance of REITs as a mainstream investment option. So perhaps it’s appropriate to learn that just last month a REIT was involved in one of the biggest real estate deals of the decade.

Westfield America Inc. (WFA) entered into a 99-year lease with the Port Authority of New York & New Jersey for the retail portion of Manhattan’s World Trade Center. The portion includes 427,448 square feet and will be renamed “Westfield Shoppingtown World Trade Center.”

The deal will close in early August, according to company officials, with financial terms of the deal remaining undisclosed until then. It was part of a larger $3.2 billion lease deal between the Port Authority and private real estate firm Silverstein Properties for the office portion of the complex.

Yet it’s not really Westfield America’s decision that advisors should take note of, according to Jay Hyde, senior director of communications for the National Association of Real Estate Investment Trusts. Hyde suggests that the deal is indicative of the increasing visibility of REITs in the general real estate market and of their growing acceptance as an alternative asset class. “Most people involved in the business have been trying to get the word out about REITS,” he says, “and having one involved with such a high-profile property has to help.”

Going Up

As late as 1990, there were only about 40 or 50 REITs with an average market capitalization of $95.7 million, according to a report published by diversified real estate company Lend Lease Corp. Today, there are 158 REITs with an average market cap of $850.8 million that control some $250 billion worth of real estate throughout the country.

There are a number of legislative and market forces behind this trend, chief among them the government’s decision in 1992 to allow REITs to manage their own properties. In the past, a REIT could only own the properties and had to outsource the management.

Other factors have also served to stabilize the real estate business in general and soothe the fears of advisors still smarting from the real estate collapse of the late 1980s. A much more comprehensive pool of information allows developers to monitor closely new building starts and thus avoid overbuilding. Moreover, the real estate financing market is more heavily dependent on public loan securities and thus is subject to a greater level of scrutiny than 10 years ago. This has helped eliminate much of the speculative and ego-driven development that led to past problems.

It’s worth noting, however, that such industry changes don’t constitute the only pitch being made by REIT advocates. Another strong attribute of the asset class is its very low correlation to other investments. Since 1993, the Wilshire REIT Index has a 0.20 correlation to the S&P 500, 0.06 to the Nasdaq Composite, 0.15 to bonds, 0.13 to international stocks, and 0.41 to the Dow Jones Utilities Index.

One might wonder why REITS are able to stand up fairly well when the general markets are turning sour. The answer, according to Richard Steiny, a senior VP at money management firm AssetMark Investment Services, which actively utilizes REITs, pertains to the lease obligations of REITs’ tenants. “REITs have contractual obligations from tenants. The leases could be one year to 10 years,” Steiny says. “Thus they have much more stable cash flows compared to regular corporate America and have a lagging quality towards a recession.”

Coincidentally, this could be evidenced by the relatively successful performance of REITs this year despite a downturn in many other major asset classes. The NAREIT Index, which tracks the performance of all publicly traded REITS, is up 4.41% thus far this year, compared to a 4.5% gain for the Dow Industrial Average, a 2.56% loss for the S&P 500, and a 5.4% loss for the Nasdaq.

More to Come

According to Lend Lease, there’s still more room for improvement. The company said in its March report that REITs are trading on an average of a 20% discount to the current private market value of the real estate assets they hold. Also, while residents of major metropolitan cities across the U.S. might see the previously skyrocketing value of residential real estate beginning to fall off with the recent stock market troubles, REIT experts say this trend is working independently of real estate values as a whole. “The value of, say, a condo or apartment in New York City is speculative and does not represent what’s happening in the office space area,” says Steiny. “Real estate values are still quite strong overall.”

But who knows? With big-name deals like Westfield America/World Trade Center hitting the news, and experts noting that REITs are trading at a big discount, these securities might soon disappear like a hot property from the classified section.


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