The 2010 Editorial Advisory Board of The Institutional Real Estate Letter – North America convened in mid-April to discuss the challenges and opportunities in today’s institutional real estate investment marketplace
From the Current Issue
At the start of 2009, very few investors could have predicted the strength of the recovery of listed real estate securities. Developers, particularly in China, Hong Kong and Brazil, were among the first to recover on the back of a rapid improvement of the housing environment and, in some cases, distressed valuation levels.
The Institutional Real Estate Letter – North America sat down with one-time bond trader, now full-time author Michael Lewis to talk about the collapse of the financial market, Wall Street’s day of reckoning and Lewis’ new book, The Big Short: Inside the Doomsday Machine, which takes a look at the few investors who bet against subprime loans in 2005, predicted the financial meltdown and made money in the process.
The purpose of this article is to question whether the use of debt in real estate investment is, indeed, a prerequisite or if “unleveraged” returns are a realistic alternative. It is pertinent to ask this question at this time, as excessive debt in some property funds has harmed rather than assisted performance.
There is a running joke within the derivatives community that at every conference, every talk begins: “U.S. commercial property is the last major asset class without a developed derivatives market.” As long as that premise remains a given, it is instructive to look at why that is the case. Why is it that in the three or so years since the U.S. property derivatives market got going, total volumes have scarcely exceeded $3 billion, a derisory amount for a potential major market? I offer six major reasons.
There are a lot of folks out there banking on the premise that the markets have bottomed and commercial real estate pricing is on the rebound. In some ways, it certainly looks that way. Several recent transactions have rocked what was, up until recently, a very stagnant market. In each case, a well-located, well-leased class A property drew multiple bids totaling 25 or more, driving pricing up and cap rates down to less than 7 percent, 6 percent and even less than 5 percent.