Fears Ran High that Commercial Real Estate would Fail-Not So

By January 6, 2011Traditions Property Blog
Real estate mutual funds rang out the year with a 2l.6 percent gain disproving the fear of many for another real estate nightmare.  Hotels and apartment showed the largest gain but even the runners up, office and industrial, showed significant gains of 21% to 19% .   This year’s gain are not expected to be as high as those seen this year. 
Real estate funds defy forecasts

NEW YORK – Jan. 6, 2011 – Despite rumors of an upcoming collapse in commercial real estate, real estate mutual funds continue to bring home solid returns.

Investors bracing for part two of the financial crisis, this time in commercial real estate, missed out on a 27.6 percent gain, according to Lipper, by real estate mutual funds in 2010. These funds capitalized on discounted prices for commercial property and real estate investment trusts as well as lucrative dividend yields.

“There was less of a distressed environment (for commercial real estate) than many perceived,” says David Lee, portfolio manger of the T. Rowe Price Real Estate fund, one of the top-performing real estate funds last year, returning 29.9 percent.

Using 2010 as a guide, investors are closely watching trends going into 2011 that might influence real estate mutual funds, including:

Changing dividend yields.The fact commercial real estate investments tend to pay market-beating dividends is one of its big attractions. But thanks in part to the jump in REIT stock prices, the group is currently yielding 3.5 percent, which is low relative to historical averages and current long-term Treasury rates, says Keven Lindemann of SNL Financial.

The big wild card, though, is that many REITs are boosting their dividend payouts. During 2010, 52 REITs of the 125 that SNL tracks increased their dividends, a trend that bodes well for future yields, Lindemann says.

Shifting real estate demand amid economic recovery.While investors tend to look at REITs as a group, mutual fund managers know to slice the market into areas that behave differently during economic cycles, Lee says. Hotel and apartment REITs, for instance, were standouts in 2010. Hotels have enjoyed higher room rates and occupancy. Hotel REITs returned 41 percent in 2010, Lindemann says. Even the laggards, office and industrial REITS, returned 21 percent and 19 percent, respectively, despite concerns of slow job growth, he says.

Improving health of real estate companies. Real estate companies, relatively high borrowers, were mostly able to refinance their debt during 2009 and are in much better health now, says Ron Florance, managing director of investment strategy for Wells Fargo Private Bank.

Apartment REITs have also benefited, as people didn’t rush to buy homes or were unable to get mortgages, he says. Apartment REITs returned 48 percent in 2010, making them the top performers, SNL says.

But commercial real estate funds face dangers. REITs’ dividend yields are less attractive as Treasury yields rise, Florance says. Many commercial real estate companies, meanwhile, face debt payments the next four years that could become onerous if the economy isn’t healthy, Lindemann says. “It would be very surprising … if we saw another year of such significant outperformance.”

© Copyright 2011 USA TODAY, a division of Gannett Co. Inc.