CHICAGO — Real estate investors will need to change the way they invest in the next five years if they expect their real estate portfolios to outperform bonds, according to a soon-to-be released study by LaSalle Investment Management Inc.
And with the convergence of real estate and private equity, investors will have to investigate the partnership structures of the company operating the real estate as much as the property that company owns.
"For over five years, the weight of money has pushed up prices and boosted real estate returns," according to the annual report by the Chicago-based real estate investment firm. But times are changing. For the next three years, investors will have to find new ways of investing in real estate to earn more than current earnings on a fully leased property, said Jacques Gordon, global strategist for LaSalle.
"It looks like we'll have low interest rates for a while, and with low interest rates we will have too much capital wanting a premium to bonds," Mr. Gordon said.
LaSalle estimates there is $22 trillion in commercial real estate worldwide. Public and private institutions own about $7.9 trillion, up 25% from 2005. The institution-owned real estate includes $1.5 trillion controlled by publicly listed real estate investment trusts and property companies, a 15% increase from last year. The increase would have been higher if the U.S. dollar had not fallen compared to currencies in Asia-Pacific and Europe, he noted.
Among the new real estate strategies recommended are international, development, private equity investments in real estate companies and niche sectors such as senior housing and laboratory buildings. Core real estate — stable, fully leased properties — is expensive and not without risk, he said. Investors need to add new investment strategies to earn returns that reward them for the risk they are taking over bonds.
"People are happy at 100 to 150 basis points over Treasuries," Mr. Gordon said. "Some people are happy with 5.6%, which is a pretty skinny risk premium."