REIT And Wrong

Real Estate Investment Trusts are gaining the investment community's favor Billions of dollars have poured into stocks and funds as the market has achieved an accelerated, "future shockish" velocity in volume and pricing.     Velocity attracts both speculators and fools (not quite the same). Now real estate is about to attract billions again. Hopefully it won’t end with accelerated inflation punctuated by deflation. (That's possible, but not for a while.)     Residential real estate lost its investment luster when it deflated like a blown-up balloon meeting a sharp nail. It was meant to be because it violated the fundamental law of economics: The ratio between supply and demand determines pricing unless speculators and greater fools become a madding crowd, which is exactly what is going on in the stock market.     Many of the billions about to travel the real estate trail will invest in a Real Estate Investment Trust, or REIT, which Business Week tabs as an investment that has "come of age." I agree. Last year, REITs had their best year in 20, outperforming the S&P index by better than 50 percent. Institutional investors (the really big boys) recognize that users are dominating this recovery, rather than developers, who build mostly because they get financing. Common sense may have returned after a six-year holiday when "discipline" was only a word found in the dictionary.     Today is a very different time for REITs. The ventures are a way of investing in real estate with stock like liquidity and the risk spread over several or many properties. REIT management is rapidly maturing and directors are more than paid stooges for entrepreneurial founders who, when flush with fresh money, would buy anything that looked good in a brochure. The specter of speculative over building is not breathing fear into most markets because lenders have become more selective and analysts wiser. Buildings are being built for proven markets, not lenders. Profits come from buildings that satisfy specific demand. That is rule number one. Rule number two is never forget rule number one.     For REITs looking to invest, there are still bargains out there controlled by insurance companies, some institutions and banks, as well as Japanese-owned real estate. Some REITs focus on adding value, therefore they look for under-priced possibly under used properties so they can boost returns and cash flow. Others look for "legitimate" assets that meet market demands and yield enough profits so the REIT can pay attractive dividends as its stock appreciates. If the management has a fine track record, Wall Street will add its own rewards and the stock will be classified as premium. Particularly rewarded last year were mortgage backed securities, hotels (like Dracula, they keep rising from the dead and buried), regional malls, industrial and office.     As an avid observer of marketplaces and real estate trends, I believe San Diego has entered the second phase of its true-recovery stage, which is accelerating. We are attracting investors from everywhere who are convinced we are going to go through explosive growth (slower and steadier would please me much more). They smell a marketplace that reminds them of inflating properties. (No, it isn’t the old days, but it’s very much improved.) They look at population growth, under built supply, cautious new construction, climbing effective rents in commercial, apartments and industrial, and even projected improvement (finally) in homes for sale.     We are a "Southern Silicon" with exceptional weather. UCSD's Connect is a work of marketing genius, just like the "Joint Venture Silicon Valley Network" created through brilliant strategy by Santa Clara County and portions of San Mateo, Santa Cruz and Alameda counties. The real estate market there is on fire. I recently analyzed several properties as well as Northern California conditions, and found that the "new billionaires" and their "lesser" executives had bid up land and home prices like the Japanese had in the Hawaiian Islands some years ago. The blue bloods look at these upstarts with less than delight as they invade staid country clubs with an unstaid new culture.     Northern California REITs are now buying Southern California properties and portfolios, recognizing that Rip Van Winkle finally awoke. Partners are looking at the opportunity to be acquired or go REIT themselves with renewed interest. Groups are cautious about "losing their own sovereignty," or being bought in an acquisition, through already appreciated stocks. That takes study of fiscal evidence plus chemistry. As I always tell my clients: There is a difference between ego, which is necessary, and vanity, which is destructive because it won’t listen to anyone.     Sanford R. Goodkin is chief executive of Del Mar-based Sanford R. Goodkin & Associates and a consultant to Real Estate Investment Trusts.

Home | Features | Info | Cover Story | About Us | Back Issues