Despite decade-low yields, housing expected to bring higher returns once economy recovers
Despite weak commercial property values and cash flows, real estate will continue to attract capital in 2004, particularly from investors looking for a higher-yielding alternative to fixed-income investments, including long-term treasuries, corporate bonds and other forms of debt, according to Stan Ross, chairman of the board of the USC Lusk Center for Real Estatecolor>.
"Compared with other fixed-income investments, real estate will be the asset of choice," Ross said.
"At 6 percent to 8 percent currently, real estate yields are the lowest in a decade, but they offer a premium over other fixed-income investments," Ross said. "Many real estate investors will accept low yields at present because they think yields will improve as the economy continues to recover and property markets begin to revive."
Because real estate will continue to attract investment in 2004, developers and property owners will have ready access to capital next year. But they need to lock in financing before interest rates start to increase, Ross noted.
"In 2004, interest rates will be the wild card for real estate," Ross said. Although the Fed hasn't give any indication that it plans rate increases, "rates will go up – the questions are when, how much and how fast," Ross said.
Ross advised investors to closely track demographic and population trends to anticipate future investment and development opportunities, for example, in developing homes, apartments, retail centers and offices for the nation's growing Hispanic and immigrant populations. He said opportunities also will be found in the public sector as cash-strapped federal, state and local governments try to form more joint ventures and alliances with developers and investors to develop or redevelop public facilities or sell assets. Governments will also seek to enter into more leases, sales or sale-leasebacks with the private sector in order to raise capital, address budget shortfalls, and dispose of underutilized or surplus properties.
"Long-term, real estate will continue to be a strong investment alternative for institutions, high net worth individuals and other investors," Ross said. "It offers relatively high yields, good appreciation, ready availability of capital, some tax shelter for high net worth individuals, and sound exit strategies."