REAL ESTATE: THE UN-COLA OF ASSET CLASSES
At the recent TIGER 21 Annual Conference, investor Sam Zell shared his thoughts on real estate and other topics in an interview with TIGER 21 founder Michael Sonnenfeldt. Hearing about the opportunities and potential pitfalls of investing in real estate brought home how different it is from other popular asset classes. Think of it in terms of those old 7-Up commercials that branded their beverage as “the Un-Cola.” Like 7-Up versus cola, real estate is not necessarily better or worse than other asset classes, but it does present a distinct and worthwhile alternative.
The special characteristics of real estate as an investment take on particular significance to TIGER 21 Members now, because allocations to this asset class have risen for three straight quarters to reach 30 percent of the average TIGER 21 Member’s holdings. This makes it the most popular asset class among our Members.
A closer look at real estate highlights why it can be thought of as the Un-Cola of asset classes, and also why so many TIGER 21 Members may be opting for real estate investments.
What Makes Real Estate Different?
From a conventional investment perspective, asset classes are defined by both a degree of assumed homogeneity of their constituents (i.e., the members of that class behave somewhat similarly to one another) and by a track record that gives investors some sense of the risk/reward characteristics of that asset class. Zell’s comments about real estate demonstrate some ways that real estate breaks the mold of these traditional asset class parameters, and there are some other important distinctions as well.
Here are some of the ways real estate is different from other asset classes:
- It is not dominated by public investments. Zell pointed out that while there is a highly-liquid public REIT market, a substantial amount of real estate investment is still done privately, and that the characteristics of an investor’s real estate allocation will be greatly affected by whether public or private investments dominate that allocation. For investors looking to escape the retail herd mentality, real estate still offers more selective opportunities.
- The track record is incomplete. Traditional investment consultants use historical returns to define the risk/reward characteristics of an asset class ‚Äì which can be a trap because history does not always repeat itself. The long track records of stocks and bonds play a significant role in shaping investor expectations for those asset classes, but for real estate, the track record is too short and incomplete to create a standard risk/reward expectation for it as an asset class. Zell stated that the modern REIT era began in 1993, so the history is limited by years and also by the fact that the availability of these investments is very different now than it was back in 1993.
- Investments in the class are not especially homogeneous. Increasingly, investors have become accustomed to most components of an asset class moving more or less in lock-step with the class as a whole. Real estate on the other hand retains enough property-specific characteristics that individual investments cannot be assumed to behave roughly the same as the class as a whole.
- There is still a place for active management. Those unique individual characteristics of specific real estate investments represent an opportunity for people who are looking to add value rather than settle for generic asset class participation. At a time when indexing has come to dominate stock market investing, this emphasis on individual opportunities may be refreshing to discriminating investors.
- Income production is still a significant trait. Here’s another refreshing thing about real estate ‚Äì it can still produce a decent income yield. REIT indexes have dividend yields in the neighborhood of 4 percent, and individual properties can produce significantly more. That’s a clear edge over the stock market’s dividend yield of around 2 percent and Treasury yields ranging from about 0.50 to 3 percent.
- It may be an especially pure country play. As Zell shared anecdotes about his real estate experiences in other countries, it brought home just how localized the return-drivers of real estate investments remain. At a time when international competition and global interest rate conditions have a profound impact on stock and bond performance across borders, the degree of dependence of real estate on local economic and policy conditions can make it an especially pure way to invest in countries you think are generally moving in the right direction.
So real estate is the Un-Cola of asset classes ‚Äì it deserves to be thought of as a distinct class of investments, but it defies some of the conventions that define other asset classes.
Why the Appeal to TIGER 21 Members?
Interestingly, while TIGER 21 Members on the whole have been building their real estate positions, Zell revealed that he has been downsizing his. This is not because he has soured on real estate investing in general. His view is that in recent years real estate has been driven to valuations that might dampen demand going forward.
However, Zell also emphasized that real estate investing is for people who are in it for the long haul ‚Äì those willing to wait for downturns to pick off attractive opportunities, and those willing to ride out temporary setbacks for the sake of investments they believe will recover.
Whether you personally think this is a time to increase real estate investments, scale back, or stand pat, this discussion highlights why TIGER 21 Members in general have made real estate such a significant part of their asset mix. As investors who have spent long years building and shepherding businesses, they are used to making investments with a distant time horizon in mind.
Also, having added value in the business world, they are attuned to looking for investments that add value rather than settling for generic indexes. In short, they are the types of people who have a taste for the Un-Cola of asset classes.
Barbara GoodsteinPresident & CEO of TIGER 21