Los Angeles – Lured by attractive returns and more transparent reporting, opportunity funds, pension funds and insurance firms will increase their investments in real estate the second half of 2003, targeting equity plays and mezzanine debt, according to Stan Ross, chairman of the board of the University of Southern California Lusk Center for Real Estate (www.usc.edu/lusk).
“While foreign investment in U.S. properties could decline in the second half, institutional players will step up their investments as they continue to diversify their portfolios and meet allocation guidelines,” Ross said. “Investors are betting that many commercial property markets are nearing the bottom of the cycle and could begin to recover next year.” He added that investment in commercial mortgage backed securities and other forms of debt financing also will increase this year.
“Corporate America has been hit by new accounting rules that will require them either to move off-balance sheet assets back on their books or sell them,” Ross said. Companies also are continuing to sell and lease back assets in order to free up capital tied up in real estate. “The result is that more corporations and other owners are interested in disposing of assets at the same time that more institutional buyers are looking for investment opportunities,” he explained.
The former vice chairman of Ernst & Young also noted that advances in technology have created more sophisticated platforms to track investment performance, promote standardization, facilitate benchmarking, and increase transparency in reporting. “Rating agencies will expand their coverage of real estate as technology continues to evolve and companies put more transparent reporting into place,” Ross said. “Investors will be better able to evaluate, rate and underwrite real estate financing transactions. This will result in pricing of real estate assets and securities that better reflects the underlying risks.”
In addition, Ross said that private syndications are being reborn, not as tax shelters, but as investment vehicles for high net worth individuals seeking high yields and alternatives to the stock and bond markets. “Following the reduction of the capital gains tax, investors that previously used 1031 tax-free exchanges could instead choose to sell their properties, pay taxes at the lower rate, and reinvest in real estate or other assets.”