U.S. Investors Use Indices for Real Estate Investment Insight

A variety of regularly published indices are used by investors for bench-marking, risk assessment, and other investment measurement. When considering an investment in real estate for example, there are two indices that, based on actual property transactions, measure the average price appreciation for U.S. real estate; at the property level.

Both the Moody’s/RCA Commercial Property Price Index (CPPI) and the CoStar Commercial Repeat-Sales Index (CCRSI) are available for the aggregate U.S. commercial property market, as well as for important and influential market segments. Both index series are based on a version of the repeat-transactions methodology, popularized by Case and Shiller.

The CPPI and CCRSI measure the implied monthly change in market value for an investment property that has had “normal” levels of both economic depreciation and capital reinvestment. They do not measure income or total returns at the property level, nor do they measure returns to investors on property investments in which any debt is used.

Both the CPPI and the CCRSI are published monthly rather than quarterly, and both are based on actual transaction prices rather than appraisals. This means that both indices produce significantly more accurate measurements of movements in property values over time, when compared to appraisal-based indices, whether at the property level (such as the NCREIF Property Index) or at the fund level (such as the NCREIF ODCE Index, the PREA|IPD U.S. Quarterly Property Fund Index, or the Cambridge Associates Real Estate Index). In addition, both cover a significant amount of the commercial property market in the United States.

The U.S. housing market as a whole has improved dramatically over the past several years. In mid-2014, property prices vaulted to their highest level in more than five years, adding to signs of an improving real estate market recovery in the United States. With regards to residential real estate specifically, the median price of a new home increased a record 11.2 per cent in August 2014, to $256,000; the highest level since March 2007. When compared to August of 2013, the median sales price jumped 17 per cent, the largest rise since December 2004.

A Way to Exit The Stock Market And Earn up to 12 Per Cent

Even those who think the market offers long-term promise are less enthusiastic about its immediate future.

If pushed to say whether I think we’re on the cusp of a real correction, over 5 to 10 per cent, I’d say that I’m not sure; but the market doesn’t feel great. – Jenny Van Leeuwen Harrington of Gilman Hill Asset Management (Westport, Connecticut, U.S.A).

That said though, most financial advisors have expressed caution about trying and exit the stock market given that it is high now, and then reinvest later when it’s low. But, if history is any indication, many nervous retail investors will not heed their strong advice and instead will cash-in while the market is high and jump out. If you are one of those investors, here are some options to consider, if you’re looking places other than the stock market to invest your money:

Since 2005, a growing number of investors have been investing in alternatives, such as private equity like peer-to-peer lending, real estate investments, and investing in commodities. Over the past decade, many of these alternative investment offerings have established long histories of great returns and stability.

Seek-out the protection of market-neutral products. These investments are designed to earn a strong return whether the market rises or falls. This is one of the advantages of investing in shipping containers.

“Peer-to-peer” lending websites like Prosper.com and LendingClub.com match up investors with individual borrowers seeking lower interest rates. Peer lending industry experts say investors are getting returns that range from 5 to 12 per cent, and the returns don’t move with the stock market.

Be well aware though that, despite their appeal to savvy, confident investors, the experts recommend that alternative investment holdings should comprise no more than 7 per cent of your total investment portfolio, while money-lending should be limited to a maximum of 10 per cent.

UK Real Estate Investment Will Grow to £20 Billion by 2019

According to analysts’ forecasts, based on a survey of investors’ five-year views, investment in the UK’s real estate sector will grow to £20 billion (€25.5 billion); by 2019. Why the sudden interest in investment? Some say this 82% increase can be attributed to alternative investments becoming much more appealing and acceptable, to institutional investors.

The survey found that 90% of investors intend to increase their exposure to real estate holdings, over the next five years. By how much? On average, respondents said they were looking to increase their allocation to alternative investments by 9%, over the same 5 year period.

“As we move towards 2019 and beyond, with what indicates to be an ever-increasing investor appetite, it’s likely many of these assets will break out of the alternatives bracket and become a more mainstream choice for investors.” – Mr. Chris Ireland, UK Chairman & Lead Director of Capital Markets at JLL

According to a report from Real Capital Analytics, Europe remains a major draw for North American and Asian capital. Canadian investors and their American counterparts continue to target European property for investment. In the United Kingdom alone, the U.S. dollar has dominated investment this year, with an estimated €8.3 billion invested in the first nine months of 2014. On the other hand, Asian investment in European property is still in its infancy.

The higher investment returns, relative to conventional real estate investments, as well as greater expertise in investing in alternatives; will also drive investment volumes in the sector up. Sometimes referred to as “the beginning and end of adult life” (student housing and retirement homes), are regarded as potential growth sectors. Both of these investments, which have already attracted significant institutional capital, may very soon find themselves reclassified as mainstream investments.

Recent reports suggest that key points of interest for investors investing in real estate will be student housing, expected to increase 70%, as well as hotels and hospitality; with a 69% increase in investment.

Davenport Laroche Adviser Recommends Real Estate Investments

Given the volatility and uncertainty in the equities market, the world’s leading investors and industry analysts recommend that every investment-seeker consider introducing real estate investments to their investing portfolio. Not surprisingly, this message was echoed in a recent telephone conversation I had with an alternative investment adviser at Davenport Laroche.

According to the company’s representative, aside from owning their own homes or paying-down a mortgage, investors are enjoying several other ways to invest in real estate; including: Secondary Properties, Real Estate Income Trusts (REITs) and alternative investments such as Real Estate Limited Partnerships (RELPs).

With so many appealing investing options, it can be overwhelming for the novice investor. Thankfully the gentleman I spoke to from Davenport Laroche took the time to provide insight into my real estate investment options and investing alternatives. Here is my own interpretation of the information I received:

Although Secondary Property Investments have been seen as a profitable addition to an investing portfolio, some critics claim that personal real estate is not a very liquid alternative. According to some experts, owning a second property can provide challenges for investors who need access to their investment capital quickly. On the other hand, there are those industry veterans who are adamant that if you need to sell a piece of property, you can. But, that said, if your intention is to squeeze every last cent of profit out of a real estate investment, it might be difficult to sell “overnight” and thus it may appear illiquid.

Real Estate Income Trusts (REITs) have long been considered a safe and more liquid means for private investors to gain exposure to property markets. However, there are some experts that are concerned that, unlike RELPs; REITs are linked to the volatility of the overall stock market. Albeit REITs offer liquidity, they come with a series of potential pitfalls. For example, there are some analysts that have voiced concern over the fact that REITs can be readily affected by equity market trends, as well as by interest rates.

Real Estate Limited Partnerships (RELPs) are essentially a privately-held and more appealing version of a REITs. In markets characterized by volatility, an increasing number of investors are becoming enamored with RELP opportunities, primarily because their returns are not tied to public markets. This disassociation limits the volatility that commonly plagues REITs, while at the same time still (typically) offering an impressive investment return for investors, upwards of 10%.

The representative from Davenport Laroche cautioned that RELPs are not for people “looking to make a quick buck.” Instead, these real estate investments are ideal for investors seeking longer-term returns.

“A good piece of real estate is like a blue chip stock. It won’t make you rich overnight, but it will perform well.” – Senior Analyst at the Real Estate Investment Network

Summary

Investors can make an educated real estate investment by looking at property trends in the area or region they are buying into. But, this means much more than simply looking at current real estate values. To get deep insight into what you can expect, Davenport Laroche’s representative suggested that investors research other issues, such as job growth in the region, GDP performance, economic development, and reviews. This information will determine whether those factors will positively (or adversely) affect property values in the future.