Enduring Value

Two years ago, Investment Advisor took a broad look at the REIT and real estate investment market. In that story”(Is It Safe?” March 2001), a planner in Cleveland complained that the problem with real estate was that it was a really tough sell to clients, compared to all those wonderful returns that the overall stock market was providing. My, how times have changed. Yet for Leo Wells, president of the Wells Real Estate Funds, times haven’t changed that much: he was a firm believer in real estate investing then, and he remains a real estate evangelist today. Editor Jamie Green caught up with Wells in late February to discuss the rosy state of real estate investing, the Wells’ approach, and whether the market is overheated and fixing for a cyclical fall.

How will 2003 shape up for real estate? I think you’ll see another great year. The media–the printed press and television–have been really slow to pick up on [real estate as an investment option], but now they are, and when investors see that, you’ll have more people willing to invest in real estate. If they don’t see [real estate] on TV or in print, [they figure] there must be something wrong with it. Since they don’t see or hear about a diversified portfolio [in the media], real estate has been a slow mover. Yes, it’s a harder sell, but so what? Isn’t that what you get a commission for? It’s not like taking orders in a drive-in window at McDonald’s; you’re supposed to sell.

I’ve always thought a salesman was a person who caused people to do something that was good for them that they wouldn’t have done on their own. As you can tell, I believe in good salesmen.

As you know, historically, what the media has said is that stocks, bonds, and cash make up a diversified portfolio, in spite of the fact that stocks and bonds together don’t quite make up what real estate does in total investment in the United States. But people forget that. I’ve always thought it was an oxymoron to say you had a diversified portfolio if you didn’t include real estate.

I heard some planner say on TV that if you own a house, that’s enough [of a real estate investment]. But a house isn’t an investment, an investment is something you can buy and sell and live off the proceeds of the sale.

So our approach always has been to argue that you ought to have 20% real estate in a good overall balanced portfolio. And the only drawback for most people is that it’s not liquid; you can’t go out and give someone 14 bricks and three doors and two windows. But if 80% of your portfolio is in investments that are liquid, that 20% shouldn’t make any difference.

You mentioned that the general media is beginning to discover real estate, but is it still a hard sell with advisors? Or has real estate gotten more acceptance? I think it has [gotten more acceptance], but I’m not so sure if most planners aren’t reactionary anyway. If someone walks in the planner’s door and says they want X, Y, and Z, most planners try to find X, Y, and Z. But the really good ones say “If you want X, Y, and Z, go down the street. If you want someone to determine what’s best for your profile, stay here.” And those planners have, to some degree, taken on real estate in the right fashion, and they’ve been doing that for a number of years. They understand assets that aren’t correlated.

So what’s happening right now is in some ways a reaction to wanting to eat on a regular basis and pay your bills, because how hard is it to go out and sell a mutual fund these days? If you get hungry enough you will sell real estate, because people will buy it. And most people love real estate.

Real estate defines a tangible asset. Is it that the older you are, the more valuable a tangible asset is? Yes, I think so. As we get older and we’ve made dumb investments, we’ve learned that the ones that are not tangible, well, it’s really hard to go get those back, and it’s easier to cheat somebody on an intangible asset. Whereas if you’ve got an office building leased to AT&T and it’s 250 million square feet and 60 stories high, you can see that; no one hauls it off in the middle of the night. It’s not like all this Enron stock, where even people who were working there lost everything, right in front of their eyes.

If you’d invested, for instance, in the Enron building instead of Enron stock, even as an employee you’d be better off. That building is still there. Yes, they sold the building for about 60 to 70 cents on the dollar, but 60 to 70 cents is better than zero.