Investing June 15, 2007

Real Estate Market Strong in 2006

June 15, 2007 (PLANSPONSOR.com) - The strong private real estate arena provided a good foundation for the public real estate market during 2006, with the high level of merger and acquisition activity a key factor driving Real Estate Investment Trust (REIT) performance.
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A news release on Mercer Investment Consulting’s latest real estate newsletter, said the 2006 performance may be better than 2007 because  REITs are highly valued by historical measures with the risk of a price correction. Mercer Investment Consulting expects REIT returns in 2007 to lag 2006 returns.

The real estate asset class delivered strong performance during 2006 as measured by three key indexes, according to the news release:

  • The NCREIF Property Index returned 16.6% for the year ended December 31, 2006.
  • The NAREIT Equity Index   returned 35.1%.
  • The EPRA NAREIT Global Index registered a gain of 42.4% for the year.

This compares with a 2006 gain of 11.8% for the S&P 500.

On a sector basis, returns in 2006 were down from 2005, but the outlook for apartments, industrial, office and retail real estate is generally positive in the U.S. In 2006, the apartment sector returned 14.6% compared to 21.2% the year before, while the industrial sector posted a 17% return in 2006 compared to 20.3% in 2005.

The office sector was the strongest in 2006, with a 19.2% return compared to 19.5% in 2005. The retail sector’s performance declined to 13.4% in 2006 compared to 20% in 2005, according to Mercer.

With the formation of REIT-like structures worldwide, property investors are able to have greater access to the global capital markets. So the overseas real estate market continues to grow as legislation permitting creation of REIT-like structures is adopted in major real estate markets in Asia andEurope, Mercer said.

Infrastructure as an asset class is growing and its low correlation to the equity market and stable and predictable cash flows have caught the attention of institutional investors, the release said. These investments have historically produced attractive risk-adjusted returns, but regulatory risk is a key concern for investors.

Additionally, the long-term nature of the investments is subject to credit and default risk and the high leverage used in financing the transactions exposes investors to inflation and refinancing risk, Mercer noted.

The Mercer newsletter may be downloaded by subscribers at www.mercerIC.com .

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