Real Estate Funds Are Hot in Cooling Market
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How can real estate funds still be doing so well when the housing market is having trouble? Well, for the first part, housing is a very small part of most real estate funds. These funds concentrate on commercial properties, so the cycle of risk is typically different than the housing markets.
So far this year, real estate funds are up about 22.16 percent, and they were up about 8.37 percent in the third quarter, according to Lipper Inc., which tracks funds. For the past five years, the return is about 22.13 percent.
“I think for many investors it’s a puzzle because they see that the housing market is softening,” said Jeff Tjornehoj, a senior researcher at Lipper.
Also, the real estate funds if they do have residential in their portfolios, it is in the apartment market which has become more profitable as potential homeowners sit on the sidelines waiting for the market to turn.
But the forces that have led to a slowdown in the housing market, such as a supply that outstrips demand, can likewise affect other parts of the real estate market. So the question that has long loomed over real estate funds is, of course, how long can such a run last?
While investors in the residential market might have received their answer, many observers of real estate funds remain optimistic, if somewhat cautious. via the washingtonpost.com.
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Comment by Spencer Hill on 4 October 2006:
Most funds and REITs (traded and non-traded) are based in commercial property in the top 20 MSA’s and are fairly liquid properties as far as real estate goes. Also these properties values are based on their income production. Therefore if the market overbuilds Class A office properties the value in that market goes down because rents are lower, but most these properties have long 5-10 year leases to Fortune 500 companies so the properties value stays up. Its not as easy to add more inventory in the institutional commercial real estate market as it is in the residential single family market.