Optimism over US economic recovery

Analysts are increasingly optimistic that the economic recovery in the US will continue into this year and global investors are mirroring that sentiment, according to a new poll.

In a Bloomberg Global Poll of 1,000 investors, analysts and traders who are subscribers to the news service, more than two out of five affirmed they think that there are more opportunities to make money in the US now than the previous quarter.

It is the highest number since the poll began in July 2009 and the optimism comes as US real estate investment trusts (REITs) are set to seek a bigger piece of the market.

According to the National Association of REITs a portfolio that 30% invested in commercial property shares delivered a higher return relative to one more heavily tilted toward private equity funds.

Its study found that pension funds typically put less than 10% of their real estate allocations into publicly traded REITs to protect against stock-market volatility. But a bigger REIT allocation, and a smaller one in private equity, would offer better diversification and more consistent returns, according to Brad Case, NAREIT’s vice president for research.

‘The public side is liquid, so therefore when investors start to get concerned about the future of asset values, they sell their REIT stocks, whereas they can’t get out of their private equity real estate funds. That lag is what gives the institutional investor the diversification benefit,’ he explained.

The NAREIT study analyzed 22 years of data encompassing both the 2008 credit crisis and the savings and loan collapse of the early 1990s. It examined REIT returns compared with the three main types of real estate private equity: so called core funds, which buy properties with mostly cash; high yield opportunity funds, which can use as much as 70% borrowed money and aim to boost returns beyond 20%; and value-added funds, which exist between the two.

The study found that a portfolio consisting of 30% REITs, 49% in core private funds and 21% in high yield funds averaged an 8.2% annual return from 1992 to the third quarter of 2010. A portfolio with 9% REITs and 20% in value added funds returned 6.7% a year for the same period.

But a portfolio 30% in REITs may add too much risk to the investments, according to Mark Roberts, global head of research at Dallas based Invesco Real Estate, an asset management company whose property investment options includes private equity funds.

‘When you’re looking at that kind of composition of real estate, what investors need to be mindful of is that is starting to take the leverage level of their real estate portfolio upwards of 40 or 50% or more. Relative to, say, an unlevered real estate market, that amount of leverage will double the volatility of returns,’ he said. Invesco research shows that about 15% invested in REITs maximizes returns without increasing risk, he added.

The largest, best known real estate private equity funds are run by investment banks including Goldman Sachs and Morgan Stanley, as well as asset managers such as Blackstone Group, Starwood Capital Group and AREA Property Partners. Many of them made their reputations with high-yield opportunity funds that delivered annual returns of as much as 40% in the late 1990s.

There were 414 high yield funds last year, down from a 2009 peak of 466, according to a survey by Real Estate Alert, a trade newsletter that covers commercial property investment. After losses brought on by the 2008 credit crisis, those funds reduced their equity raising goals and yield targets, which averaged 16.9% last year, according to the survey.