Investors Looking for Real Estate Gems, as REITs Gain Appeal
By: Darrell Delamaide
Investors are slowly regaining their appetite for risk and looking for gems or even valuable scrap among the wreckage of the commercial real estate market.
One example, The Wall Street Journal reported, is distressed-asset investor David Tepper’s recent stake in Gramercy Capital, a lender and property owner with billions of dollars in leveraged investments.
Gramercy’s prospects don’t look that great. It has $2.7 billion in debt investments that include some aggressive commercial real estate loans made during the bubble. For instance, $473 million in mezzanine loans are junior-ranked securities that face especially high risk, the Journal said.
But an investment in physical property with the $1.1 billion purchase of American Financial Realty Trust in 2007 gave Gramercy hundreds of income-producing properties, including bank branches. Most of those have long-term leases, with a weighted average maturity of 10 years.
With real property in decent shape, Gramercy might survive even if the securities portfolio turns out to be worth little, the Journal said. Of Gramercy’s $5.2 billion in debt obligations, all but $52.5 million are backed by specific assets and have no general recourse to the company.
Current market capitalization is just $140 million, given concerns about how the likely debt defaults will affect the company. But a valuation closer to the company’s $875 million book value may be in store for patient investors, the Journal said.
“JP Morgan Asset Management”: http://www.jpmorgan.com/pages/jpmorgan/am, for its part, sees opportunities now in Real Estate Investment Trusts (REITs). The basic strategic case REITs remains intact, the group says in a recent analysis, and some of the current problems in valuation, such as volatility and correlations, will ease as these return to normal levels.
“REITs’ most redeeming quality is that they provide access to two distinct asset classes – real estate and equities – and thereby offer investors the potential for tapping into the ‘best of both worlds,’” the group writes in its Insights newsletter.
The group listed several core reasons for its view on REITs:
• REITs often act like a proxy for real estate investments over the long term, capturing many of the performance attributes of direct investments in property.
• REITs may be more highly correlated to equities in the short term, potentially acting as a hedge against declining real estate values and also indicating the direction of real estate value momentum.
• REIT volatility will decrease significantly over the next several years as REITs de-leverage and yields return to a historical relationship of 60 percent of total return, improving the risk return profile of the asset class.
• REIT correlations with equity will move closer to historical norms over the next several years.
• REITs are a publicly traded, liquid investment that allows investors the opportunity to tactically re-allocate at inflection points in the real estate cycle.
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