Land Grab

By Karen Hube
Not too long ago, it helped spark a global recession. Now, real estate is backbut you still have to pick your investment spots carefully. Here
are eight of the best areas to explore with your financial advisor.
1. Rental Properties
With millions of Americans unable to buy a home, or skeptical about ownership, the rental market is surging.
Some 1.2 million homes are in foreclosure, and home ownership rates are well below the peak they hit in 2004. That state of
affairs has fueled a huge demand for rental properties. We had a housing boom focused on building single-family homes, so the rental
side is still undersupplied, says Sam Katzman, chief investment officer at Constellation Wealth Advisors. Investors can profit in two ways: For a
shorter-term return, they can develop new apartment buildings, secure leases and then sell. Or, rather than sell, investors can collect rent as a
hedge against inflation.
Apartment companies are the most discounted stocks in the U.S., says Paul Curbo, a senior director at Invesco and manager of the Invesco
Real Estate Fund. And they can produce cash-flow growth in the 8 percent to 9 percent range.
There are also opportunities in modest single-family homes, says William Tickle, senior investment advisor at Ballentine Partners. Through
private equity, his firm is investing in bundles of such homes in need of renovation. Ballentine buys the homes for between $40,000 and
$70,000, renovates them and rents them until a more robust housing market makes selling a good move. Homes at that price point are easier
to rent for a nice yield while housing prices recover, he says.
2. University Housing
There are more and more college students. Where will they live?
Enrollment at U.S. colleges and universities has grown steadily for 44 years, and as more foreign students come to the U.S. to
study, theres no sign of the trend reversing. Yet the development of off-campus housing evaporated after the housing decline in 2007,
says Al Rabil, CEO of Kayne Anderson, an alternative investments management firm. In most real estate asset classes, like retail and
industrial, there was a simultaneous drop in demand when the supply was cut off, he says. But in student housing, you had no new supply
but increasing demand.
Strong valuations and steady growth prospects make this investment a long-term portfolio stabilizer. These are defensive investments,
because once an academic year begins and leases are secured, you know what your revenue stream is going to be until the next business
cycle, says Paula Poskon, an analyst for R.W. Baird, an investment management firm.
3. Private Debt
With banks still reluctant to loan, who will fill the vacuum?
After the bottom fell out of the credit markets in 2008, many commercial real estate developers couldnt find banks willing to
lend them money. The gap in lending has been narrowing as credit markets heal, but there is still unfulfilled demand for loans, says
Ballentines Tickle. Private investors assets can fill the financing gap, he notes.
Private loans are being extended across all industries, often for small- to mid-sized companies. Real estate borrowers are turning to private
loans for large sums. Before 2008, it was common for a developer in need of, say, $100 million, to cobble together loans from three banks. But
banks dont like doing these syndicated loans anymore, creating opportunity for the private investor. And for the moment, at least, the risks for
private investors fulfilling the demand have declined as the real estate market has rebounded. The ability to underwrite is clearer than at the
peak of the market and at the bottom of the market, says Tickle.
4. Senior Needs
An aging population is creating real estate opportunities.
With 11,000 Americans turning 65 every day for the next 22 years, senior housing and medical office space are two areas of the real
estate market likely to thrive, says Rabil of Kayne Anderson.
The best opportunities in senior housing lie in buying properties that need renovation, improving them and selling them for a profit, says Rabil,
whose private equity fund acquired six senior housing facilities in September.
A second opportunity lies in medical offices, whose growth will be fueled by demographic trends as well as healthcare reimbursement policies.
As more outpatient services are offered by medical offices at lower cost than at hospitals, insurance companies are increasingly limiting their
coverage to the amount a patient would pay at a medical office. Rabil believes that the policy will raise the demand for treatment through
outpatient medical facilities.
5. Self-Storage Facilities
Americans relocating for work need somewhere to store their things.
As the economy picks up, so too does the need to store stuff. A strengthening job market means more people moving to take jobs, and
an improving business climate means businesses like contractors and landscapers expand and need more equipment on hand. Self-storage
companies are already reaping the benefits: They were one of the best-performing sectors of the real estate market in that last quarter of
2013, says Baird analyst Poskon. Valuations have been driven up, but Poskon believes that these stocks still have further to run. There has
been no new supply to compete with existing landlords in the last four years, because it has been very difficult to find financing to build self-
storage operations, and municipalities are reluctant to issue zoning permits because they arent big job or tax generators, Poskon says.
6. European Office Buildings
The judicious investor can take advantage of Europes slow recovery.
European banks have started off-loading their bad real estate debt. While valuations on core propertiesmeaning renovated buildings
have recently been run up by investors looking for high-yielding investments to replace low-yielding core bonds, valuations on distressed
properties are very attractive.
We see opportunity for outsized returns through acquisition from a distressed seller, renovating buildings and then selling, Tickle says, adding
that it's possible to gross 20 to 25 percent annual returns in higher quality and higher legal-standard markets such as England, France,
Belgium, Germany and Poland.
Such opportunities have already come and gone in the U.S., which is a couple of years ahead of Europe in its recovery, says Marc Cardillo, a
managing director at consultancy Cambridge Associates. Now European banks are healthy enough that they can take a loss selling some of
the assets on their books at a discount to investors.
7. Emerging-Market Commercial Space
A short-term pullback creates long-term opportunity.
When investors started yanking money out of emerging-market stocks last year, real estate buyers started moving in.
sell-off has no impact on the long-term trends of real estate, says Scott Crowe, global portfolio manager at Resource Real Estate, a real estate
investing firm based in Philadelphia. But it did create some good valuations.
Crowe particularly likes office and retail space in Hong Kong. You can get very strong rental growth right now, he says. Another prospect:
industrial warehouses in China, part of the complex system of bringing consumer products to a burgeoning middle class, Crowe says. China
has never had a modern distribution system. This is an interesting way to play the rise of the middle class in China.
8. New Commercial Space In Tokyo
After natural disasters, whats still standing?
In the wake of the devastating tsunami and earthquake in Japan in 2011, demand for well-constructed office buildings has
soared. Structurally sound buildings that perhaps can also generate their own energy are in demand, says Invescos Curbo. Local and global
companies with offices in Tokyo want to trade up. The opportunity in this space depends on trends in rental pricing, and we expect rising
rents and occupancy rates, and improved earnings growth, for some time to come, he says.
For more information: Marc Cardillo, Cambridge Associates, 617.457.7500, cambridgeassociates.com; Scott Crowe, Resource Real Estate,
855.747.9559, rredx.com; Paul Curbo, Invesco Real Estate Fund, invesco.com; Sam Katzman, Constellation Wealth Advisors, 212.697.2500,
cwallc.com; Paula Poskon, R.W. Baird, 800.792.2473, rwbaird.com; Al Rabil, Kayne Anderson, mmorales@kaynecapital.com
kaynecapital.com; William Tickle, Ballentine Partners, wtickle@ballentinepartners.com, 781.314.1333, ballentinepartners.com.
Read More From The April/May 2014 Issue:
The 7 Best Destinations for Private Airplanes
Q&A With Mauricio Umansky
Over There: Emerging Markets in Real Estate
Home Is Where the Heart Is: Healthy Home Design