Saturday, June 04, 2005

The quiet power of private investment.

Large corporate real estate transactions may dominate newspaper headlines but it is private investors who dominate the market, say Canadian real estate insiders. And, while returns on institutional real estate investments have surged well into double-digit levels, private investors are pocketing profits twice as large.

"The press covers the huge deals, the public companies, the real estate investment trusts. It doesn't cover deals done by private investors and that is probably the most active segment of the market today," says Blake Hutcheson, head of the Canadian operations of broker CB Richard Ellis Ltd.

With a variety of options for high-net-worth individuals, and returns higher than for institutional investors, private individuals or groups are a significant force, especially for transactions under $10-million. Private investment funds, particularly, are becoming popular vehicles.

"Private investors account for about 40 per cent of all transactions recorded across Canada and in many case they are pocketing returns in the 20 per cent to 30 per cent a year range," Mr. Hutcheson said.

By comparison, the most recent Canadian Property Index showed that institutional investors averaged a 12.9-per-cent return on all forms of property investment last year, compared with 8.4 per cent in 2003. Retail investment returns led with an average 16.9-per-cent annual return, followed by 14.4 per cent for industrial properties, 10.8 per cent for office and 6.1 per cent for residential. The index is maintained by the Institute of Canadian Real Estate Investment Managers/International Property Databank.

Private investment in real estate can cover a wide range of options, says George Carras, president of RealNet Canada Inc., which tracks real estate transactions across the country. They can include individuals buying or selling, partnerships, syndicates or even funds made up of individual investors or a combination of individual investors and institutions.

"What I can tell you is that private investors are by far the largest force in sales valued at $10-million or less," he says. "Since we don't have a lot of large assets in Canada, $10-million or less makes up the bulk of the market."

In the period ending last June 30, the most recent for which RealNet has statistics available, private investors accounted for 40 per cent of all transactions under $10-million. In the under $10-million range, they represent 75 per cent of all apartment sales and 45 per cent of all retail property sales.

The reason?

Real estate favours private investors, Mr. Hutcheson says. "The ability to use the capital cost allowance provisions [depreciation] to reduce taxes on all income is a lure. . . . In addition, a good investment can provide both cash flow and longer-term capital appreciation.

"Besides, just like mutual funds, there is a product that suits the needs of almost any high-net-wealth individual."

High net wealth is the key to investing in commercial real estate. Purchasing a $2-million building will require about $400,000 cash as a 20-per-cent down payment. Units in funds organized by wealth management companies or syndicators usually cost in the $50,000 to $250,000 range. Partnership stakes vary according to the size of the deal and the number of partners involved.

"Partnerships are usually structured with a general partner in charge and a number of limited partners," says Michael Cowie, executive vice-president at Colliers International in Toronto. By his own account, he has participated in about $100-million worth of real estate partnerships in the past five years.

"They are usually structured on the basis where an investor gets a certain guaranteed return in the 7-per-cent to 10-per-cent range each year with a share of the capital appreciation when the property is sold. Taken together, the cash flow each year plus gain on the sale can reach into the 20 per cent to 30 per cent a year range."

Mr. Cowie recently closed one such deal, purchasing a commercial structure on the western fringes of the Greater Toronto Area for $10-million. In that deal he had three partners and bought from a group with 11 partners.

Private investment funds have become increasingly popular with high-net-worth individuals, says Paul Braun, managing director of CanFirst Capital Management of Toronto. In 2002, for example, CanFirst organized a $45-million, seven-year closed-end fund to invest in industrial properties. To date it has generated a 33-per-cent a year return in cash and capital appreciation. Minimum investment in that fund was $100,000.

CanFirst this year raised a $55-million fund, also aimed at industrial real estate investment, with units priced at $250,000.

"We could easily have raised more," he says. "There is no shortage of private investors. The problem we face is a lack of supply of industrial properties to invest in. They have become tremendously difficult to find but we have a two-year window to invest the money, then a further five to improve the value of the assets and sell."

Cumberland Private Wealth Management Inc. is another company that has had considerable success with private real estate investment funds. In 1998, it organized a fund that acquired older industrial buildings in Toronto's King Street West and Spadina Avenue area, upgraded and improved them and eventually rolled them into a vehicle now known as Allied Property Real Estate Investment Trust. Original fund investors pocketed returns "significantly greater than 20 per cent a year," says Gerald Connor, Cumberland's chairman.

"There is money to be made in niche markets for private investors," he says. "We look at things in the $5-million range. We want to acquire at about $40 to $50 a square foot, spend $30 to $35 in improvement and get a building valued at $100 a square foot.

"We look to double our money in five years."

Cumberland raises a new fund valued at between $20-million and $30-million each year. If the fund cannot find anything to buy, then the money is returned to investors. If purchases are made, then the investment is locked in for up to seven years. Minimum investment is $50,000.

In Halifax, Future Inns Canada Inc. has provided its investors with returns running between 20 and 30 per cent a year, says Sandy McEachern, vice-president. The company has hotels in Halifax, Dartmouth, Cardiff, Wales, plus one under way in Plymouth, England, and another two in the planning stages, one in Moncton, N.B., and one in Guelph, Ont.

All were financed and are now owned by individual investors, who purchased units ranging in value from $150,000 for the original Dartmouth property to $250,00 for the most recent Plymouth Future Inn.

The approach was based on syndications organized as tax-sheltered investments by the Journey's End chain in the mid 1980s.

The original Dartmouth property was 145 rooms and cost $3-million. The new Plymouth Future Inn, by comparison, will cost $11-million.

"Investors look on it almost like an annuity," Mr. McEachern says.


To take advantage of the real estate trends can be best achieved through Private Real Estate Investment.

Friday, June 03, 2005

US Home Prices Realize the Largest Price Gain In History!

Average US home prices increased 12.5% from the first quarter of 2004 to the first quarter of 2005. This was the largest increase in history. Does that mean that the white hot price increases will continue -- Good question. We thin those eye-popping increases will moderate with the increase in mortgage rates on the short end of the spectrum and an increase in supply. Want to see all the detail and how your city and state rank? Go to: Housing Price Increases.

The ever present cry of a bubble is somewhat overdone as the markets showing the greatest prices increase continue to be in Nevada, Arizona, California, Hawaii, Florida, Washinton DC, Virginia and Maryland. In general the primary increases have occured on the coasts. Meanwhile, Texas is dead last at a 3.77 % annual increase.

We continue to maintain that employment and in migration trends are the main drivers of a solid housing market. To take advantage of the real estate trends can be best achieved through Private Real Estate Investment.

Private Real Estate Funds Offer an Alternative Investment with Superior Returns!

The stock market goes up; the stock market goes down. And over the past several years, it seems to have gone down quite a bit more than it’s gone up. The vagaries of Wall Street have caused smart investors and investment professionals to look outside of the traditional capital markets and to diversify their holdings to ensure prosperity, despite these difficult economic times. One particular, yet little-known and sometimes misunderstood area that has consistently yielded positive performance is private real estate investment funds.

When most people think of investment in real estate, they think of Real Estate Investment Trusts (REITs). Like REITs, private real estate funds sell investment units and acquire real estate and related investment-grade assets, providing investors the opportunity to participate directly in the ownership or financing of real estate projects. Both REITs and private real estate investment funds offer diversification for investment portfolios, and can provide stability in otherwise tumultuous economic times.

However, unlike REITS, private real estate investment funds are not encumbered by set distribution rules, SEC requirements, the inability to shift investment focus, and the outside pressure to constantly acquire and grow – at almost any cost – in order to deliver FFO (funds from operations). In addition, the overhead costs to operate a private real estate investment fund are significantly lower and the bureaucratic red tape attached to decision making is non existent. These factors allow many private real estate funds to take a more strategic and long-range view of investment in real estate – a view that usually results in a steady, above average cash-on-cash return, regardless of underlying economic conditions. Moreover, private real estate investment funds are often structured as a cash flow vehicle with capital appreciation, making them a reliable hedge against inflation, and a more sound alternative to bonds or bond funds.

For more information concerning yield plus safety see our Investment Offering.

Monday, May 23, 2005

Investing versus speculation -- A primer on investing for the future!

Investing is a misunderstood term these days. Financial news abounds from cable outlets, to print media, to national news networks to the internet. Everywhere you turn, someone is prepared to tell you what to do with your money. Each has a "hot" tip, a "system" or a "simplified" means to make your money grow to levels unimagined.

An investor is not simply someone who has placed money in a stock, bond, mutual fund or other security. A true investor recognizes the trade off between prudent risk and the consequent reward. Investors typically come in two varieties, defensive and aggressive.

A defensive investor is typically cautious and is interested in safety plus freedom from the rigors of analyzing and montioring investment performance. The defensive investor will be primarily invested in high quality bonds and common stocks of companies with long performance histories. A defensive investor will forego matching the average return of the markets in return for the security of maintaining principal.

An aggressive investor may make informed purchases of securities that entail a higher degree of risk and hold the potential for a greater return. Still an aggressive investor will make sure that purchases of common stocks or other securities have a demonstrable margin of safety. An aggressive investor will endure a degree of additional risk in the pursuit of returns that exceed market averages.

In contrast a speculator may be anyone who makes an uninformed purchase of a security or chooses to ignore the margin of safety in choosing investments. Never under any circumstances throw money at a "hot" tip or the latest investment fad, simply because you think it may make money for you. If you do not understand the "arithmetic" of a company and cannot simply state why you are investing in a company, choose capital preservation and a lower return.

Consider this, between March 2000 and October 2002, US stocks lost 50 % of their value, an astounding $7.4 trillion. Within individual stocks the carnage was even greater as declines of over 90 % were realized in many technology companies that survived and of course countless other comapnies no longer exist, including Enron, Worldcomm, Global Crossings and a host of names that you may have never heard mentioned.

Understand that if you lost 90 % of the value of your principal, you would need to earn a 1,900 % return on subsequent investments to recover your losses. An investment earning 8 % per year would return your principal balance from $500 to the original $10,000 in 39 years.

Meanwhile, had you invested the original $10,000 in a well thought out investment earning 8 %, your principal balance would be $186,000 in the same 39 years.

For more information concerning yield plus safety see our Investment Presentation.

Sunday, May 22, 2005

Private real estate equity will remain the vehicle of choice for most equity investors!

Continuing its transformation from an alternative investment to a core holding for investment portfolios, institutional real estate allocations could increase three-fold over the next decade, according to a new report released today by Deloitte & Touche USA LLP and Rosen Consulting Group.

The report suggests that institutional real estate allocations will benefit significantly from a growing percentage of the investment capital flowing into the market from pension funds, which held 4 percent of their assets in real estate in 2003 and who will be targeting higher allocations going forward. Additionally, global capital markets will be tapping into this space, both domestically and abroad. During this period, the report shows that allocations may jump from the current 5 percent allocation level to the 10 to 15 percent range.

The report, “Breaking Out: A Sea Change in Real Estate Capital Markets,” explores the implications of these trends for various industry players and for the several major product types that make up the property investment markets. Additionally, the report examines the U.S. economy during the same period.

“The last 10 years have been a breakout decade for the property markets,” said Dennis Yeskey, national director of Deloitte Consulting LLP’s Real Estate Capital Markets practice. “Now, leaving its niche trappings behind, it will begin to behave more like a commodity investment, something akin to traditional debt and equity. Real estate has outperformed other asset classes during the most recent downturn and the recovery, with returns far exceeding those available in competing asset classes and with minimal volatility. We’ve never subscribed to the notion that the commercial market was overvalued, but the fundamentals show this is a more attractive asset class.

“As the population ages, pension funds will increasingly require higher levels of cash flow, and greater predictability for those cash flows,” says Yeskey. “Real estate addresses both of these needs, particularly in the core and core-plus styles that dominate most pension fund investment programs. To make a meaningful impact on plan income, shifts will have to be relatively dramatic. Increasing allocation holdings to 5 percent will not begin to solve the plans’ income problems. Instead, higher-yield investments will need to play a substantial role in the investment allocation strategy going forward.”

According to the report, private real estate equity will remain the vehicle of choice for most equity investors during this period, with real estate investment trusts (REITs) likely increasing their leverage asset base over the next several years. New issuance of common shares should increase in the near future, especially if REITs’ high share prices persist. In the long run, REITs will face increasing competition from other public companies, most likely real estate operating companies.

For more information see our Investment Presentation.

Wednesday, May 18, 2005

Frothy housing market not set to burst.

It seems not a day goes by, without someone one the news talking about real estate prices being too high to be susstainable. Check the following article to see why we believe the "experts" continue to miss the point.

Frothy housing market not set to burst.

I have seen a true down market in the mid 1980's, when you could buy new homes in Houston with your credit card. The oil bust left many unsold homes on the market.

In western Colorado in the early 1980's when the primary employer, Exxxon, pulled out of their oil shale project, local real estate prices were so weak that they moved down literally by the day.

The stories have been similar over the years. The key to the real estate market lies in the strength or weakness of the local economy.

The next time you hear some "expert" talking about an unsustainable rise in housing prices ask yourself, "How is the economy in my town?" "Are wages rising?" "Are people moving to the area?"

In late 1979, interest rates began to rise. I mean really rise! With rates on mortgages moving into the upper double digits. Still homes sold. Interest rates are a factor, but rising from 4.5% to 6.5% is not likely to depress housing prices.

The key will be in the income levels of prospective buyers.

We believe our business will continue to be strong. For more information see our Investment Presentation.

Tuesday, May 17, 2005

Reg D Offerings -- What Are They and How Can They Improve Your Portfolio?

Reg D was adopted by the SEC in 1982, it was designed to make it easier for expanding small companies to raise capital. Unlike previous SEC regulations which were vague, Reg D set forth specific, objective rules for offerings which were exempt from the full SEC review process. Three rules, 504, 505 and 506 each define specific requirements for creating an exempt offering.>

For additional information check Regulation D explained..

Friday, May 13, 2005

Technorati Profile

Advantages to Real Estate Investment

  1. Stability – Studies have shown that real estate values are more stable than stock prices, which consistently have higher volatility.
  2. Strong Current Yield – Real estate investments typically return regular cash distributions to investors at rates that have on average, historically exceeded those from fixed income investments.
  3. High Overall Returns – Studies have consistently shown that total return for real estate funds have consistently between those for stocks and bonds, with a risk profile closer to bonds.
  4. Growth Industry – The growth potential in some western and southern “Sun Belt” state represents a very large opportunity to capitalize on shifting demographics and population growth.

Check out the information at Investment Presentation.