Posted on February 16, 2016 · Posted in Industrial / Flex, Investments, Land, Multi-Family, Office, Retail

It’s been said frequently, and anecdotally, over the past several months that the current global uncertainty makes US commercial real estate look like an even safer investment bet.

“When the sky is falling, real estate is usually at the bottom of the ‘sell’ list,” thanks to the illiquid nature of the asset class, writes Heidi Learner, chief economist with Savills Studley, who provides some hard evidence on why this is the case.

Certainly, the global economic volatility continues. On President’s Day, for instance, the headlines from around the world illustrated the topsy-turvy environment. The European stock market, which has taken a pounding lately, had rallied, while Japan’s economy had contracted for the fourth time in seven quarters. Bad loans in China, which are at a 10-year high, and bankruptcies in Brazil—some 5,500 in 2015—were also in the news.

Against this backdrop, changes to the Foreign Investment in Real Property Tax Act—long a thorn in the side of the commercial real estate industry—could hardly have come at a more opportune time. FIRPTA reforms enacted this past December will enable qualified foreign pension funds to invest in commercial property without facing a capital gains tax, Learner writes. The amendments to FIRPTA also will mean that foreign entities can increase their holdings in publicly traded REITs from 5% to 10% “before triggering tax upon sale of their real property interests.”

Domestic index investors, too, may need to increase their allocations to REITs “to become better aligned with the composition of the overall index,” according to Learner. Real estate trusts will have an industry group to call their own in the Global Industry Classification Standard Index after the close of trading on Aug. 31 of this year. Since MSCI and Standard & Poor’s developed the GICS in 1999, REITs have been grouped under the broad heading of “Financials,” but will come out from under that umbrella in the third quarter.

It might be assumed that  REITs as a group would have gotten swept up in the recent waves of stock market volatility. However, Learner points out that REITs have been “significantly more stable” during market downturns than the broader equity universe.

A month-by-month analysis of total returns between January 1972 and December 2015 showed that during those periods when S&P total returns were negative, REITs followed suit just 31% of the time. That implies, she writes, that “on a relative basis, equity REITs outperformed the S&P 500 more than two-thirds of the time during those months when overall equity performance was down.” Then there’s the yawning gap between cumulative returns from the S&P 500 and the NAREIT Equity REIT Index during that 44-year period: the REIT index’s returns were just about twice as high.

Learner cautions that this doesn’t necessarily mean we’ll see continued acceleration in CRE activity and “a sustained move upward” in pricing, although she adds that net income on a per-square-foot basis has improved “fairly steadily” as cap rates have declined. She cites tighter underwriting standards and cap rates that are “priced to perfection.”

“Even so, if commercial real estate were to weaken from current levels, chances are the sector will still outperform most long-only investments in the coming months,” said Learner.


Source: GlobeSt.

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