Real Estate Investing Facts, Tips and Advice

As talk of a housing bubble continues to swirl and home sales drop, commercial real estate - both here and overseas - may still offer handsome rewards for investors.

Those that believed the real estate stock business was headed for a downswing have been proven wrong. Mutual fund investing is as strong as ever. One way this market is developing is through REITs, a tax-advantaged form of property ownership that revolutionized the sector in the United States 15 years ago.

Now foreign governments are beginning to adopt similar laws, and many real-estate investors say a whole new era of profit opportunity is dawning abroad.

“You can buy real estate in Japan now for less than you could 10 years ago,” says Samuel A. Lieber, manager of Alpine International Real Estate. “In Germany, valuations haven’t changed in 10 or 15 years.”

Alternative strategies for real estate investing

With stocks trading sideways and bonds in an interest-rate flutter, investors are desperate for alternatives. If you’re considering getting into the property game, rather than getting out, here are some justifications, and some very handsome funds to consider.

The heartbeat of commercial real estate is the demand for space, which in turn is driven by employment. The U.S. unemployment rate is 4.7%, a figure that was considered impossibly low just a decade ago.

“Job growth is the primary driver in commercial real estate,” says David M. Lee, manager of T. Rowe Price Real Estate a fund. “You are seeing occupancies rise, and when occupancy gets to a certain threshold, pricing power returns to landlords.”

In addition to higher rents, a rise in occupancy rates pushes up the value of existing buildings. Higher prices in construction, forced in part by booming demand for materials in China and India, inflates the cost of putting up new structures.

“Five years ago you bought a building for $100 million, putting up $50 million in equity,” says Martin Cohen, chief investment officer of the Cohen & Steers series of real-estate mutual funds. He notes that 50% leverage is the norm in the commercial-property market. “Today the building is worth $150 million, so your equity has doubled.”

Real estate investing cycles

This is important because real estate is subject to at least two cycles:

1. An overarching sensitivity to the business cycle, primarily in the form of interest-rate sensitivity
2. The cyclicality of various industries, from retailers in regional malls to corporate tenants in office towers

Focusing on the management of property companies allows these funds to reduce rapid price swings in their shares, and more stability translates into higher returns.

Foreign real-estate markets, meanwhile, are quite different. REITs pay much higher yields than operating real estate companies; they have to in order to qualify for the tax break on their dividends. Overseas, REITs are commonplace only in Australia and South Africa, and to a lesser extent in Holland.

“In the last three years we’ve seen France adopt the REIT structure with great success,” Lieber says. Japan now has 26 REITs, and the first ones have been launched in Singapore, Hong Kong, Malaysia, Korea and Taiwan.

“More importantly, Germany and the United Kingdom will probably create REITs this year or by the beginning of next year,” Lieber continues. “We see this as very beneficial, because it brings in a different kind of buyer for real-estate securities - investors who want income.”

Spreading your wealth

Will real estate funds appreciate in the next five years the way they have in the last five? No. But expect dividends to continue to supercharge an income-oriented portfolio. Retirees/baby boomers in particular should consider a real state sector fund as a key element of their portfolio.

Many individuals might be warned away from real estate because it seems clear that a bubble in residential property is deflating, notably in San Diego and the other most-overheated markets - although this hasn’t been the case in the Orlando housing market.

But the correlation between commercial and single-family properties is low. The local papers in New York carry stories these days about falling home prices and rising office rents on the same page.

In the end, commercial real estate is a good portfolio diversifier, and therefore well worth owning, whether it’s popular or not. Right now, it most certainly is.