Real estate investment trusts were last year's strongest asset class, yielding a nearly 20% return and besting the broad market S&P 500 index by four percentage points.
In fact, REITs have surpassed the broad market for several years in a row now. What's more, a different dynamic seems to be at work in real estate these days. With private equity and hedge funds scooping up residential real estate in bulk, it appears that Wall Street is crowding out what historically has been primarily a Main Street business run by mom-and-pop investors.
Indeed, Bloomberg reports that the Metacapital Mortgage Opportunties hedge fund returned 38% to shareholders in just the first 10 months of last year—a substantial gain for private investors even as the public continues to bear the massive mortgage losses of Fannie Mae and Freddie Mac.
And at the street level, some odd things are happening in the till-recently moribund sector. The Washington Post reported two weeks ago on one ordinary-seeming house in the Capitol Hill area that received 168 bids and ultimately sold for $400,000 above its $337,000 asking price.
To get a global picture of real estate investing, AdvisorOne turned to Stephen Blank, a senior resident fellow with the Urban Land Institute, a Washington, DC-based real estate think tank established in the Great Depression era. In Blank's view, there are multiple reasons for real estate's appeal to investors today:
"Real estate has proven itself over the past couple of years to be a solid economic performer," he said. "If you look at NAREIT versus the S&P 500, it's four years in a row that REITs have outperformed stocks. Investors start to notice that.
"Also, REITs pay dividends; people notice that. And they've been able to obtain reasonable amounts of leverage at historically low interest rates. People notice that.
"Normally, real estate shoots itself in the foot by overbuilding," Blank adds, noting that property construction over the past five years has fallen—and remained—at the lowest rates in a generation.
"All of that starts to get noticed," Blank continues, adding that real estate has also proven valuable as a means of diversifying investor portfolios.
"And now hedge funds, buyout funds, smart and savvy global institutional investors have gotten into the market," generating a lot of press in the process.
Blank says a wide array of investment structures is another advantage of real estate investing. "You can own the equity, you could buy the debt, you could invest in a fund that buys commercial mortgage-backed securities," he says.
"You add all that up and it makes real estate look attractive."
Indeed, there is fresh evidence of this investor appeal. In the first deal of its kind at a major wirehouse, Merrill Lynch is now offering its clients exclusive access to a nontraded REIT managed by Jones Lang LaSalle, a global real estate investment manager.
