FOSTER CITY, Calif. - It would be easy to dismiss Ronald Kaiser as a Johnny-come-lately to real estate based solely on the title of his 92-page tome "Why Pension Funds Invest in Real Estate . . . Now."
But with inflation stable and pension funds underweight in property - not to be confused with real estate investment trusts - compared with other investment classes, Mr. Kaiser's opinions sound timely.
The points that Mr. Kaiser uses to support his conclusions aren't new. But there is a freshness to them, due, perhaps, to the fact that his firm, Bailard, Biehl & Kaiser, Foster City, Calif., is not exclusively a real estate money manager. BBK manages more than $1 billion for its clients in equities, fixed income and real estate.
He doesn't appear self-serving. His comprehensive and lucid analysis gives his position the credibility of an academic.
Mr. Kaiser agrees that the time to re-enter the property markets was 1992, and Mr. Kaiser said he recommended to BBK clients then to allocate 20% of their portfolios to property. Mr. Kaiser said he would now bump that up five percentage points if the firm's investment committee allowed it.
"Five years after bottoming, they (investors) still don't want it (property) unless it's public REITs," said Mr. Kaiser in an interview.
Mr. Kaiser said attendees at the recent conference of the National Association of Real Estate Investment Managers were promoting public REITs without critical thinking to back up their positions.
"No one talked about liquidity or returns," said Mr. Kaiser. "No one talked about going from a universe that traditionally traded at a discount to net asset value to a premium."
Mr. Kaiser said he isn't opposed to REITs. It is just the wrong time to invest in them.
"It's not a growth stock," said Mr. Kaiser. "Rents increase at the rate of inflation (presently 3%).
"Three-percent growth is not the expectation of today's REIT investors," said Mr. Kaiser. "At some point there will be a disappointment."
The arguments that Mr. Kaiser uses aren't new. Historical property returns are favorable to stocks with less volatility; They beat bonds by more than 500 basis points; stocks and bonds and real estate are negatively correlated.
Domestic real estate should be a mainstream asset, Mr. Kaiser said.
Domestic stocks represent between 12% and 16% of the investible universe, domestic bonds make up about 32% and U.S. property is between 5% and 16%.
Yet, in pension fund portfolios, domestic stocks on average comprise almost 46% of total assets, and bonds make up 40%. Property is less than 3%, said Mr. Kaiser.
Neighborhood shopping centers are presently the properties of choice, said Mr. Kaiser. He also recommends cities where there is little competition from REITs, which are paying a premium for properties.
"You can't go to Los Angeles or Atlanta," he said. "Try Minneapolis and Omaha."
BBK uses subadvisers - INVESCO Realty Advisors and The RREEF Funds - to make its property investments, said Mr. Kaiser.
Opportunities in real estate
MCLEAN, Va. - The world of real estate investing has changed since J.E. Robert Cos. excavated the ruins of the real estate markets in the early 1990s as a general partner to the Goldman, Sachs & Co.'s Whitehall funds, buying properties that have racked up an average return north of 60%.
Bargains could be had from the Resolution Trust Corp. and from the portfolios of banks and insurance companies.
But the opportunities that characterized the opportunity funds of that era have diminished significantly. That hasn't stopped Joe Robert Jr., president of the McLean, Va., company that bears his name, from raising money from pension funds and endowments.
The times have changed, but not the strategy that, he claims, has resulted in no losses on the 100 transactions completed in close to 20 years of real estate investing.
"We focus on inefficiencies in the relationship between the capital markets and the real estate industry, or we focus on a specific deal to determine if we want to invest," said Mr. Robert.
"The strategy has remained consistent: searching out the arbitrage opportunities created by supply-and-demand imbalances, and using leverage," said Deborah Harmon, principal with J.E. Robert.
Mr. Robert has so far raised $425 million for the JER Real Estate Partners L.P., and is expected to reach a final close in a few weeks with $500 million.
Investors include the Oregon Public Employes' Retirement System and the Washington State Investment Board, which each committed $100 million, and the Virginia Retirement Systems, which committed $75 million.
J.E. Robert no longer makes investments on behalf of Whitehall, having sold the division that oversaw those investments to Goldman, Sachs last year. The company does remain as a limited partner in the Whitehall funds.
The strategy of the JER Real Estate Partners fund is to invest in smaller deals than those that have typified other opportunity fund investments. The company will search for opportunities in a diverse universe. The fund will make small equity and mezzanine investments in real estate operating companies, sub-performing debt, commercial mortgage-backed securities and tax liens.
"In the early 1990s when we could buy senior debt and control equity, we bought that," said Mr. Robert. "Then you saw us in other places, CMBS and mezzanine debt.
"That is what appealed to investors," he said. "And we didn't find ourselves competing against the other Wall Street firms."
"That will a core business for us," said Ms. Harmon. "Not many organizations can do $600 million due diligence on assets in 30 days and then complete a $10 million transaction. It's too operationally intensive to focus on the $10 million level," she said.