Despite the cloud lingering over housing and commercial real estate, you have to admit that real estate investors have had a good run.
In 2010 the market was turbulent, but just being patient in REITs worked well. I believe 2011 will be similar–but I expect the overall real estate market to stabilize along with the economy. Big institutional fund managers will plow money into REITs this year because they’re a lot more liquid and transparent than trying to buy and manage a portfolio of apartment or office buildings.
For smaller REITs 2010 was a good year because nimble firms could move fast to scoop up growth properties with less competition from the bigger guns, who tend to drive up prices. That play is over now. Big institutional buyers are back and are eager to put cash to work on deals. The market will favor large, well-established REITs with plenty of capital on hand.
The REIT world has grown up considerably since the financial meltdown. The survivors at the top are battle-smart, lean and hungry.
Apartment and hotel companies have seen the fastest share-price growth in the past year because operating fundamentals have come back much faster than in other property types. I expect the momentum to continue.
There are good buys in both sectors. ESSEX PROPERTY TRUST remains a standout apartment REIT, as does AVALONBAY COMMUNITIES , which has ramped up its development pipeline. Among hoteliers, DIAMONDROCK HOSPITALITY has shrugged off some financing issues and is well positioned. One risky play with a lot of debt, but also some terrific assets, is STRATEGIC HOTELS & RESORTS , It owns properties like the Fairmont Princess in Scottsdale, Ariz. and the Four Seasons in Washington, D.C. Strategic Hotels is over the worst of a very bad time and could be poised for real share appreciation.
Office, retail and industrial property fundamentals–occupancy levels and rental rates–continue to suffer the effects of the Great Recession. Industrial owners have had the hardest time climbing back, but I believe things will improve. Asia is flourishing, the U.S. is recovering and Latin America–led by Brazil–is gearing up for sustained expansion. The bestmanaged industrial REIT still offers good value: AMB PROPERTY/PRO LOGIS has a strong balance sheet and a true global footprint, including significant holdings in Brazil, China and Japan.
As for retail owners, it’s almost irresponsible to ignore SIMON PROPERTY GROUP the largest-cap REIT. Simon exemplifies smart, aggressive yet judicious management. Simon is flush with more than $1 billion in cash.
The office sector is more challenging because the desirable assets are more expensive. My approach is to buy the blue-chip name of the group, BROOKFIELD OFFICE PROPERTIES –which just refinanced a Manhattan skyscraper with an $800 million loan from the Bank of China. Brookfield owns the best buildings in leading markets nationwide and is preparing to spin off an Australian portfolio into a separate company.
Brookfield’s 50% parent, BROOKFIELD ASSET MANAGEMENT is a Canadian conglomerate with timber and energy assets as well as office buildings. It bought a big share of mall owner GENERAL GROWTH PROPERTIES which emerged from bankruptcy last year. Brookfield’s diversified asset base, rich balance sheet and tough, superb C-suite make it a one-stop stock for anyone who wants to play in high-quality global commercial real estate, timber, energy and even investment management.
Finally, in niche REITs. Life science companies are the focus of ALEXANDRIA REAL ESTATE EQUITIES , and VENTAS specializes in medical office buildings and health care facilities. DIGITAL REALTY TRUST focuses on data centers. When it comes to student housing I like AMERICAN CAMPUS COMMUNITIES Demographics and economic trends favor these niche REITs.
There’s one other outstanding retail owner: TAUBMAN CENTERS Taubman is almost the “Anti- Simon”–a focused collection of high-quality malls, rather than a huge agglomeration of some of everything. Taubman, too, has excellent management, a good balance sheet and strong growth prospects. (credit, p slatin-forbes)