When offered choices of variations between outstanding and modestly poor, the highest percentage of respondents, 32.5%, said real estate's prospects for profitability are "very good." Some 26.1% said profitability will be "good," and 17.5% indicated "modestly good."
Core property portfolios are expected to return 7% to 9% over the next five to seven years, with returns in the low teens when leverage is used, the report stated. However, investors should expect 5% to 7% total returns for properties purchased recently at "rock-bottom" cap rates.
Overall, survey respondents expect slightly higher returns in 2005 than they did in 2004. The highest returns are expected from opportunistic real estate — 15.1%, up from 14.2% predicted in last year's survey. Respondents anticipate value-added will produce returns of 12.9%, up from 12.2%; core real estate with leverage, 11.2%, up from 10.9%; unrated commercial mortgage-backed securities, 9.9%, up from 9.5%; REITs and operating companies, 8.4%, up from. 8.2%; and commercial mortgages, 6.8%, up from 6.4%.
"I think they are modestly more encouraging because we're a year further into the cycle," Mr. Blank said about the increases. "People are more confident about the economy."
Investors in core real estate are avoiding broker auctions in favor of off-market transactions, the report noted. Some core investors are also changing the definition of "core." One respondent said core used to mean 90% to 100% leased properties with credit tenants in prime markets, but now it can be 80% to 90% leased in secondary locations, the report stated.
As for opportunity funds, most of their investments — 80% or more — will be outside the United States in 2005. Topping the list are leveraged office purchases in Japan and non-performing Asian debt.
Investors are split as to whether 2005 is a good time to sell real estate and reap the benefits of what appears to be high prices, or to buy real estate, the survey indicated.
Some investors are selling, but the problem is where to invest the money, Mr. Blank said.
For example, Stanford University's $10 billion endowment cut its real estate allocation to 11% from the 22% investment it had two years ago, said Michael Russ, chief investment officer at Stanford Management Co., Menlo Park, Calif. — which manages the endowment — at a recent Pension Real Estate Association conference in Los Angeles.
"We are net sellers," Mr. Russ said. "We have not seen that much to buy, and that money is going abroad."
At the same time, the endowment is adding absolute return strategies, he said.
"Our goal is to show more returns with a different strategy," Mr. Russ said. "We're in an ongoing arms race with other universities. The premium for private equity is shrinking, and so for us to find incremental alpha we have to move money around and go where it is not popular, like … Europe, and even more so, Asia."
At the same conference, Mark Anson, chief investment officer for the $170.7 billion California Public Employees' Retirement System, Sacramento, said fund officials have been selling, not buying real estate.
"People are saying that relative value is the right concept. People are saying that the risk premium has declined," Mr. Blank said.
Real estate is really two different markets: one is the capital market and one is the asset market, and they do not have to perform together, he said.
At what point does it make sense to buy real estate? he asked. For example, some investors may buy real estate when returns are four percentage points above the 10-year Treasury.
"The question is how big is that change. I don't know, and it will take a while to figure out," Mr. Blank said.
