Property Regains Popularity As Investment By Jeff Jacobson There is currently a great deal of talk in the investment community – and beyond – about a great rotation into equities. With bonds continuing to offer only low yields, investors are seeking out better returns elsewhere. And as optimism grows that the worst of the crisis is behind us, investors are, so the theory goes, likely to be more confident about investing in shares at levels not seen since the bursting of the dotcom bubble. In this environment, what is the role of property? I believe that the changing economic environment makes the asset class a more attractive proposition. However, investors need to be more selective about where they put their money, and seek out new opportunities within the sector if they are to find the “holy grail” of asset real estate investing: stable, yet higher-yielding returns. Real estate has come a long way in the past decade. It has moved from a peripheral part of an investor’s portfolio into the mainstream. Investors are not reducing their allocation to real estate – rather they are either keeping allocations steady or increasing them, sometimes in a very meaningful way. You can understand why. High-quality property continues to offer income yields of around 4 to 5 per cent, which is highly compelling compared with fixed income. I see three significant trends in the industry. First, classic core real estate with relatively low leverage, which promises steady income returns and diversification, has always been attractive in a multi-asset class portfolio, particularly for pension funds, and is continuing to grow in popularity. Yields continue to look attractive compared with other fixed income asset classes. For investors who want to capture better returns while providing a predictable, long-term stream of income, this is a compelling case. Second, in many ways, I see us going back to the future. In the late 1980s, segregated accounts and joint ventures were the way to play the asset class. These fell out of favour during the real estate crisis of the early 1990s, and were replaced by private equity-style funds and listed real estate securities. These were the investments of choice for more than a decade, but were brought to an abrupt halt by yet another crisis: the financial turmoil of recent years. That crisis coincided with the end of the long real estate bull market, which had seen strategies become increasingly risky and relying on ever-higher leverage. Coming at the same time as a wider crisis, from which we are still recovering, it is no surprise that investors took flight and began to reassess their priorities. Investors now want greater transparency and control. And that takes them – and us – back towards where we were 20 years ago and to a preference for exerting that greater control via joint ventures, clubs and separate accounts. This is all part of the natural swing of the pendulum. When things go wrong and the experience is painful, humans are hard-wired to do the opposite of whatever has not worked for them in the past. However, investors are rightly cautious of these new types of deal. While the number of those who say they want to get into joint ventures or club deals is high, the number of deals actually being done is lower. Such deals are complicated, and require time and internal resources to implement. The third big trend is the move towards real estate debt funds. With banks facing restrictions on their balance sheets, not to mention a whole raft of new regulations, many are hampered in their ability to lend. There is clearly a role for others to step into the breach. We are seeing a growing number of investors who want to access the real estate market this way. Of course this is not real estate investing in its purest form, as it combines elements of both fixed income returns with real estate credit risk. Hence we see many pension funds take capital for debt from their fixed income allocations, not their property allocations. In summary, many investors believe that they can at last see a brighter future for the global economy. Real estate continues to give them the ability to take part in that recovery, while offering them some protection if that future is not as rosy as they would like. The typical diversified, ungeared real estate portfolio has delivered for investors over time and, provided the lessons of the past are learnt and new opportunities seized, it will continue to do so in the future. Jeff Jacobson is global chief executive at LaSalle Investment Management Taylor Scott International

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