Mercer: Real Estate Still Holds Opportunities

October 24, 2006 ( - Real estate investing in the US commercial market continues to provide attractive total returns and diversification benefits, reports Mercer Investment Consulting, Inc.

However, Mercer still issued a warning in a news release that these returns are expected to moderate in the last half of 2006 and will require a careful evaluation of what kind of returns a plan wants for a given market and for specific properties.

According to Mercer, the real estate asset class delivered strong performance for the first six months of 2006 – 7.8% for the National Council of Real Estate Investment Fiduciaries (NCREIF) and 12.9% for the National Association of Real Estate Investment Trusts (NAREIT). This compares with a gain of 4.2% for the S&P 500 in the same period.

Looking at the data by sector, the outlook for apartments and industrial and office real estate in theUS remains positive due to continued improving fundamentals. Returns in these three sectors ranged from 7.5% to 8.6% over the first six months of 2006.

Within the real estate investment trust (REIT) market, investors will begin to benefit from greater regional diversification and gain access to global markets through a more liquid means than traditional direct real estate investing, Mercer said. TheUK and Germany may have REIT legislation in place by the end of 2006. Japan’s J-REITs, which were introduced in 2001, have become highly popular, and Australia and the Netherlands have established REIT markets.

“In addition to diversification across regions, global REIT investments also have a lower correlation to global fixed income and equity markets,” said Allison Yager, a senior consultant with Mercer Investment Consulting who specializes in real estate, in the news release. “A primary challenge for global real estate managers is to have knowledgeable personnel who fully understand local market dynamics.”

Timber investments have gained popularity in the last few years as their returns and diversification benefits have roused interest by institutional investors, Mercer said. Recently, many timber managers have begun to offer their strategies as real estate investments, estimating that as much as 50% of the returns would come from land sales.

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