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Commercial real estate
investors are faced with the same choices in the economy as everyone
else (including Qualified Institutional Buyers, the "big boys on
Wall Street" - also called "QIBs"). These choices
are:
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Invest directly in
given business whether it is a real estate development business or
other business that is domiciled in the U.S.; or
-
Invest indirectly in
a given array of U.S. domiciled businesses representing one or more
classes of securities and risk (like a mutual fund); or
-
Invest directly in a
U.S. domiciled commercial real estate development project; or
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Invest directly in a
foreign commercial real estate development project or business.
The first rule of thumb
is to remember the concept of a "riskless reward". A
riskless reward (for savvy commercial real estate investors) is one that
can be obtained by providing capital investment into a broad group of
securities or fee-simple estate property interests. In our
industry this is captivated by SPDRs - Standard & Poor's Depository
Receipts ( an exchange traded fund - pronounced
"spiders"). SPDRs represent a broad measure of capital
market activity and typically provide a return of 10% to 16% per
annum. They can go to zero but the likelihood is quite
small. They offer the feature of instant liquidity (zillions of
shares in SPDRs are traded daily) so this makes the SPDR the ideal
starting point for the investment yields analysis we have in front of
us.
The annual return on the
SPDR provides a ready means of using comparative yields as one of the
key elements in the overall risk analysis because the prototypical
commercial real estate project represents (in many investors' minds) a
non-liquid investment because no ready market exists for the securities
or fee-simple real property interests. To liquidate the investment
represents some real issues as to the time it takes to obtain the
highest sales value the market will sustain for a given group of
assets. This is a key benefit (and risk) of owning SPDRs.
They can certainly lose value in any near-term business cycle, but
represent a long-term holding opportunity (at least 10 years) to your
advantage. The underlying assessment is that one is exchanging (in
theory) an investment in a liquid security for one that is not.
This means the one that is not as liquid as the SPDR must provide an
investment premium. Convention has dictated that this premium
should be on the order of 200% to 300% higher for the same holding
period in exchange for holding an investment that is illiquid in nature.
This means the first rule
- the potential yield rule - is that the investment should provide no
less than a 200% premium over the current trailing 12-month yield on
SPDRs and one should not reasonably expect to see many investments that
are expected to provide a return premium equal to 300% over the current
12-month trailing yield on SPDRs. Click
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