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Study: Real estate still hot
Study: Real estate still hot Report says the sector will continue to attract money, so long as interest rates remain low. March 2, 2005: 4:11 PM EST NEW YORK (Reuters) - Real estate will still be a money magnet in 2005 -- after record levels of investment in 2004 -- if yields on bonds and other types of assets this year continue to look less attractive, according to a report released Wednesday by PNC Real Estate
finance. The industry's strength will stem from a bountiful flow of capital still pouring into real estate, according to the Annual PNC Real Estate Outlook. Nicolas Buss of PNC Real Estate
finance, part of the PNC Financial Services Group (Research) in Pittsburgh, told Reuters he sees no slowdown this year in "the gobs and gobs of money thrown at real estate." That's what drove up real estate prices during 2004 and it will continue to do so this year, he said. In 2004, real estate prices soared to all-time highs in many parts of the country as a record level of cash flowed in, PNC's report noted. Institutional real estate sales -- to hedge funds, overseas investors, private equity funds and partnerships -- surged 50 percent to $180 billion, while the
commercial mortgage market rose 10 percent to $2.2 trillion. Real estate fundamentals such as vacancy rates improved in 2004 and are expected to continue to do so in 2005. Real estate vs. 'the universe' The party may end, though, if interest rates continue to rise, according to PNC's Buss. In that scenario, real estate yields may not be as attractive, especially compared with U.S. Treasuries, considered the safest of all investments. So real estate's red-hot performance will be at the mercy of the same yield-seeking investors. "Capital flows to the sector now depend on real estate versus the global investable universe," PNC's report said. "The strength of the capital flows will come down to investor behavior and whether lower real estate yields are acceptable in a rising interest-rate environment. "Unfortunately, for real estate, investors tend to be an unpredictable bunch." Trusts and 'fast money' The publicly traded real estate investment trust, or REIT, sector, pulled in about $6.9 billion of net inflows from mutual funds last year -- up from $4.5 billion in 2003. That amounts to 3.6 percent of all equity fund flows in 2004. But 2005 remains murky, the PNC Real Estate
finance report said. "Most analysts believe the sector now appears overpriced, or at least fully priced," the report said. REITs are trading at a more than 20 percent premium to the underlying value of their assets, compared with an historic 2 percent average, the report said. REITs ended the year trading at 14.4 times their forward funds from operations, or FFO, a key measure of REIT profit, the report said. Much of the push into REITs came from "fast money" -- hedge funds, foreign investors and retail funds -- investors that tend to be yield-driven and jump from sector to sector. Apartments The apartment sector remains the most troublesome, Buss told Reuters. "Apartments are the one property sector we're most nervous about," Buss said. "There's way too much supply." Apartment developers just keep building, he noted. The worrisome supply could get worse if the red-hot condo market cools and becomes competitive with its rental "cousin" -- or, more troubling, if the condos themselves become rentals. "Strap in," Buss wrote in the report. "It could be a bumpy ride for apartments in 2005." In contrast, the office real estate fundamentals should continue to improve at a measured pace and end the year with a national vacancy rate below 15 percent, according to PNC. The retail sector may face some challenges from slower consumer spending. "Overall, it will be an OK year for the sector, just not a great year," the report said. The industrial sector also should also see vacancy rates fall to below 11 percent, according to PNC. But rising levels of construction could slow the recovery.
Source: Cnn.com