Pramerica Real Estate Investor's global Investment Research Team consists of experienced analysts with a broad range of training in areas of finance, real estate, economics and quantitative methods, and access to the best available resources. Team members are located on four continents, providing clients with an international perspective. This depth of knowledge and diversity of experience enables Pramerica's Investment Research department to support client needs from many perspectives including the US and non-US, public and private, and equity and debt market segments.
The Investment Research department's reports cover a wide range of topics of interest to institutional real estate investors, practitioners and investment professionals. Most reports are available online in *.pdf format in the research archive on our U.S. site. To join our distribution list, please contact the Investment Research department via e-mail at research.reports@pramericarei.com.
Recent reports from Pramerica Real Estate Investors:
• Investor-Friendly Trends in Seniors Housing (June 2008).
The aging of the baby boom generation combined with the slow pace of new product makes the seniors housing market an attractive investment in the near future. The number of individuals reaching age 75 each year will rise six-fold by 2018, while the number of new seniors housing units is growing at about 1% per year. Decisions about housing are based on many factors -- including health, family resources and the single-family housing market -- but demand for housing that caters specifically to seniors is likely to be strong.
• Property and Policy: Hand-in-Hand (June 2008).
As real estate investors turn to emerging markets in search of superior growth prospects and higher returns, it is important to recognize not only the connections that exist within countries between their political leadership and market performance, but also the interconnectedness between countries and markets.
• Turkey: Two Steps Forward... (May 2008).
The report notes that foreign direct real estate investment in Turkey has increased dramatically in recent years. While investors should not underestimate the risks that still exist in Turkey, the country's young, expanding and largely pro-Western population, dynamic economy and market-based reforms make a compelling case for real estate investment over the next decade.
• To Be Green or Not to Be Green? Why That Is Not the Question (November 2007).
The green building movement has serious implications for real estate investors and developers, especially in the office sector. As more businesses conclude that sustainable practices address many competitive, organizational and regulatory challenges, increasing demand for green space will create new risks and opportunities for owners and builders.
• Diverging Strategies: NCREIF Index Insights (December 2006).
Many plan sponsors and advisers use the NCREIF Property Index as a real estate performance benchmark. With the creation of the NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE) they have a choice. The two have had very similar total returns, but recent statistics suggest that important differences have emerged in their underlying universes. Proper benchmark choice now requires an understanding of the differences between them.
• Homeownership and Commercial Real Estate: Similar but Different (December 2006).
Intuitively, homeownership and commercial real estate would appear to have significant similarities. But they are marked more by disparities than by similarities in terms of current return, total return, demand drivers and supply cycles. The modest correlation between them, plus their different attributes, suggests that they are not substitutes for each other and can be attractive complements in a diversified portfolio.
• Russia: A Challenging but Improving Investment Environment (November 2006).
Moscow is Europe’s most dynamic real estate market, with construction and take-up activity exceeding levels in all other markets. The construction boom under way is generating rapid growth in the volume of investment-grade real estate. Foreign investment remains focused on development opportunities, but demand for standing investments is growing. The barriers to entry for foreign investors are high, and market opacity necessitates prolonged and extensive due diligence.
• Brazil – Trying to Realize Potential (November 2006).
In Brazil, most office properties are developed speculatively; pre-leases are rare. Industrial real estate has begun to emerge as an investment class only recently. A few shopping mall groups operate nationally, backed by a growing number of foreign capital sources, such as U.S. or European REITs, pension funds or property firms. Brazil’s institutional residential market consists only of for-sale units.
• China – Many Opportunities, Unique Risks (August 2006).
Foreign investors have been investing mainly in Beijing, Shanghai, Guangzhou and Shenzhen. These cities and others will provide attractive opportunities, especially in retail and residential, as urbanization occurs, incomes rise and the middle class expands. But investors face risks from a deficient legal system, underdeveloped contract law and government corruption. Foreign currency control, a government monopoly on land supply and frequent rule changes are also hurdles.
• The U.S. Office Market: Flirting with Equilibrium (August 2006).
The current pace of modest vacancy rate declines and modest rental rate increases is likely to persist over the next two years. Rising real rents locally may signal opportunities for an extended episode of attractive investment returns, as a large rent-cost gap limits new construction. Growth markets in the Sunbelt and tech-oriented areas may see more rapid vacancy rate declines. Office markets in the Northeast appear near equilibrium and will experience stable vacancy rates.
• The Evolving German Residential Sector (August 2006).
Germany’s residential sector looks like a defensive play in an environment of rapid asset price appreciation and excess liquidity in the global financial system. The diversification benefits, favorable demographics and low vacancy in some regions, plus the stability of the tenant base and the predictability of income streams, appear to offer substantial downside risk protection.
• India - Completing the Investment Universe (July 2006).
Outsourcing and offshoring are spurring India’s office demand growth. Rising income, population growth, decreasing household size, a housing shortage and a decline in mortgage rates will lead to extensive residential construction activity in India. However, low market transparency, a lack of liquidity, a scarcity of suitable investment products and regulatory concerns are some of the risks investors need to consider.
• Taking Advantage of Long-Term Trends (June 2006).
Real estate has historically been a good source of stable, uncorrelated returns with a generous cash yield and capital growth at about the rate of inflation. The wide range of new real estate investment opportunities that take advantage of the long-term trends in the economy and society should provide a continuing source of attractive absolute and risk-adjusted returns.
• Asian REITs: A New Dimension for Investors (April 2006).
This report examines the growth and development of the Asian REIT market, the economic and demographic forces that should create demand throughout Asia, not only for real estate but also for yield-oriented investment products like REITs, and the potential implications of the new vehicles in the context of a global real estate securities portfolio.
• The Retail-Office Performance Rotation: Implication for Investors (January 2006).
The office and retail sectors exhibit a distinct pattern of rotating performance relative to the overall NPI. Retail has significantly outperformed the office sector in recent years, but the U.S. real estate market has reached a turning point. As office vacancies decline, office rents rise, and retail sales slow, the office sector should outperform retail for several years.
• A Move Toward European Retail (January 2006).
The performance of European office markets is becoming increasingly more synchronized, and much of the pricing inefficiencies across markets have been exploited. Concurrently, improved asset and fund management infrastructure has made retail assets more accessible to investors. Not only has retail tended to outperform offices over fairly long time horizons, but it will likely continue to enhance risk-adjusted returns.
• Size-Tiered Economic Geography: An Update (December 2005).
Using the new U.S. metropolitan area definitions, this report updates our original size-tiered economic geography. We also provide additional insights into the property type preferences of institutional investors and the return characteristics of each cluster based on the most recent NCREIF returns. The update helps real estate professionals better understand the U.S. property market and enables portfolio managers to formulate targeting and diversification strategies.
• The Rising Influence of the Hispanic Population on U.S. Real Estate (November 2005). Although concentrated in key areas, Hispanic people are moving into new regions. Large and growing Hispanic communities provide substantial investment opportunities in the retail and housing sectors. While Hispanic-focused investments are still a niche by size, the U.S. Hispanic population will increasingly impact all market participants.
• Income and Cap Rate Effects on Property Appreciation (October 2005). Property-market and capital-market forces drive real estate pricing and, thus, investment performance. But measuring the contribution of the two forces is challenging. We examine the historical relationship between property-market forces, which drive property earnings, and capital-market forces, which largely determine cap rates, to better understand how the two forces affect property values. (The above link will direct you to our U.S. Research page. Please choose the "Income and Cap Rate Effects on Property Appreciation" link on that page to view the article).
• Is it Time For Pan-European, Open-End Real Estate Funds? (October 2005). Recent changes in Europe’s real estate market will likely help open-end funds become more broadly accepted for pan-European investment. These changes include greater awareness of the benefits of such structures, the growing appetite of institutional investors for a strategic exposure to non-domestic real estate and the globalization of the investment management industry.
• Ask Not Why International, Ask Why Not International (June 2005). Changes in the global marketplace indicate that the opportunity costs of not investing overseas have grown. At least three compelling arguments – prudence, diversification and diverse opportunities – suggest that US investors should take a different approach when deciding whether or not to invest internationally.
• Water, Water Everywhere (June 2005). With property market fundamentals improving and property income nearing a cyclical low, liquidity in the real estate capital markets should remain relatively high in the near to medium term, which should keep downward pressure on cap rates, even if long-term interest rates rise modestly. In the current capital-rich environment, smaller niche sectors, such as senior housing and self storage, and international strategies offer attractive opportunities.
• The U.S. Self-Storage Market (March 2005). As the economy moves from recovery to expansion, demand for self-storage space should increase. Along with slowing supply growth, this will likely result in moderate rent and income growth in the medium term. The positive outlook for self-storage, attractive cap rates and high diversification benefits make self-storage an attractive consideration for institutional investors.
• Global REITs: A New Platform of Ownership (January 2005). This report examines the trends in the listed property sector, the key drivers of the recent REIT market growth and the implications of a vibrant global REIT market for the real estate capital and space markets and for investors.
• Employment Recovery Leads to Opportunity (December 2004). As the economy continues to recover, opportunities in the office sector will occur as new jobs appear, thus creating demand for space. The demand data shows that while the Sun Belt and California will lead the way in employment growth, a broad market recovery should present many recovery play opportunities, even in strong markets.
• Ten Trends in Mexican Housing (November 2004). Demographic trends indicate strong household formation rates, with economic stabilization permitting more families to buy a first home. Also, homebuilders can efficiently link potential buyers with public or private financing. Wider changes in Mexico’s political and economic framework have also occurred, bringing the housing sector to a much more mature stage.
• Size-Tiered Economic Geography: A New View of the US Real Estate Markets (October 2004). Articulating a regional investment strategy poses special challenges for real estate portfolio managers. We offer a way of collapsing the many US metro areas into eight clusters. This system, sized-tiered economic geography, takes into account the dominance of a few large metro areas, economic location, and in case of ambiguity, geographic proximity. The end results are simple, intuitive and effective for diversification, market targeting and benchmark exercises.
• Real Estate Cap Rates and Interest Rates - A Complex Relationship (October 2004). The relationship between interest rates and real estate values is complex. This report examines the recent trend in cap rates and uses duration, a concept borrowed from the fixed-income market, to develop a model for estimating the impact of higher interest rates on real estate values.
• Strategies of Focus and Opportunity: Trends in Public-Market Commercial Real Estate Penetration From 1998 to 2003 (August 2004). During 2003, public real estate investment companies sharply reduced their apartment and hotel portfolios, steadily acquired retail properties, held their warehouses and began positioning their office holdings for an anticipated recovery. In short, focused investment strategies that exploited transaction market conditions won the day in 2003.
• UK REITS-A Step in the Right Direction (June 2004). The UK property and investment market would benefit greatly from a tax-efficient property investment vehicle. This alone will not cure all UK market inefficiencies but is an important step toward a more efficient and flexible UK property and investment market.
• Rational Differences Between Public and Private Real Estate (May 2004). Today investors can use public or private vehicles to gain exposure to real estate. The public markets provide greater liquidity with higher volatility, while the private markets provide stability but with less liquidity. The differences in the volatility create opportunities to exploit periods of misalignment between the two markets. The strategies for arbitraging are many and diverse, but nearly all entail finding the optimal match between capital sources and property investments.
• A New Force in Asian Real Estate: Indigenous Demand (March 2004). Asia as a recovery play has become an accepted mantra as the regional upturn becomes more evident. Investment interest is intensifying, having morphed from an opportunistic play to a safe haven over the past five to six years. But going forward, indigenous pension funds likely will play a bigger role in the demand for real estate. For Western institutional investors looking to diversify into Asia, domestic investors will be the key competitors. Monies from lower-yielding areas, like Singapore and Japan, likely will be redeployed to buy assets with higher returns in markets such as South Korea and even in developing countries like Thailand and Malaysia.
• The Drivers of Housing Appreciation (March 2004). Rising interest rates will likely cause downward pressure on home prices in the immediate future, but a "bursting" seems very implausible. With a rise in interest rates, households are likely to increase their housing expenditures, preventing a free fall in prices. We expect housing will appreciate 2.5% to 3% annually over the next five years, and rising income will offset the negative effect of rising interest rates. Appreciation, therefore, will be driven primarily by households spending more of their income on housing. However, less affordable areas may be less able to withstand the downward pricing pressure of rising interest rates. The large coastal markets, which saw higher recent home price appreciation, are more likely to see stagnation, or even marginal declines, in home prices if interest rates rise precipitously.
• The Warehouse Investment Landscape (January 2004). Institutional investors must increasingly consider the trends that can affect investment in industrial assets. Warehouse is the most important industrial subtype for institutional investment, but even in this large category differences exist. Changes in retailing, declines in manufacturing and advances in logistics all help determine which property characteristics and locations will be most in demand. Focusing on Strategic Markets, with selective investment in Major Markets and limited activity in Opportunistic Markets can help ensure portfolio performance.
• Unraveling Senior Housing Starts (December 2003). Seniors housing ranks among the most promising emerging institutional investment niches, but measuring market supply trends has been difficult. The industry lacks clear classifications for its many segments, which hinders estimating new construction and market balance. This report reconciles information from two sources that occasionally have published seemingly divergent estimates for new construction. The differences stem from ambiguities in category classifications. Crafting a broadly accepted set of industry classifications would greatly reduce, if not eliminate, conflicts in the statistics.
• Joint Venture Trends in the REIT Industry (December 2003). Rather than reducing the use of joint venture partners, as financial reports suggest, REITs have actually increased their use at the property level in recent years and greatly so very recently. In fact, about 24% of REIT property acquisitions in 2002 involved joint ventures. The portion of properties held under joint-venture structures has grown from 11.7% at year-end 1998 to 13.7% at year-end 2002, representing a 30% increase in the number of properties held jointly. These figures arise from a net pace of acquisitions by joint ventures that is nearly triple the rate of overall net property acquisitions by REITs.
• The Office Market Recovery Ahead (November 2003). The conditions in the office space markets are as dire today as the conditions during the real estate market collapse in the early '90s. But as vacancy rates peak and rents stabilize, the space market recovery should be similar to the last recovery. Supply growth should remain subdued. Tenant demand should rise as employment growth resumes. Office vacancy rates should fall, allowing property owners to raise rents as the supply/demand balance returns. For investors seeking value-added returns, the office market recovery will provide opportunities to buy assets with leasing risk in high-growth markets.
• Population Aging, Pension Reform and Property (October 2003). Important changes are coming quickly to Europe's retirement
savings industry. Funds are increasingly under pressure to consider investment
in a portfolio context and thus are giving more serious consideration to
alternative investments. As new regulations and standards of best practice
emerge, funds will increasingly consider broadening their exposure to
alternative investments, particularly property, which compares favorably with
stocks and bonds on a total potential return and return to risk ratio
basis.
• Diverging Values and Fundamentals: A Phase or a Transformation? (September 2003). A confluence of forces has created an apparent disconnect
between the weak real estate space markets and the strong capital markets.
Capital market forces, supply/demand dynamics and demographic drivers have all
contributed to the ostensible disparity between pricing and fundamentals. While
some features of the current environment are more cyclical than secular, others
will be part of the new normalcy because they reflect long-term, fundamental
shifts.
• Finding Niches - Trends in Public-Market Commercial Real Estate Penetration from 1997 to 2002 (August 2003). In 2002, REITs and REOCs sharpened their strategies and
increased their focus on niche markets. These activities resulted from limited
capital raising, diverging property market trends and broadened avenues for
revenue generation. Adjustments in ownership share were modest, as limited new
capital was raised due to a difficult acquisition market.
• US Apartment Market: Between the Short and Long Run (August 2003). The US apartment market faces significant challenges over
the next 12 to 18 months. However, the long-term outlook for the apartment
sector remains attractive, underpinned by favorable demographic trends and
capital market dynamics, some of which are unique to the multifamily
sector.
• The Expanding Frontier of Institutional Real Estate (May 2003). The institutional real estate industry has undergone
profound transformation since investors made their first commitments to the
asset class nearly four decades ago. This paper examines the wide range of
opportunities in real estate investing today by reviewing the evolution of
investment strategies and vehicles over time and along the risk-return frontier.
• Adding Value in a Down Market (May 2003). This article examines three approaches to value-added investing-physical, operational and financial-and discusses some of the cyclical factors that create value-added opportunities and the risks that investors may encounter in executing such strategies.
• A Bird's Eye View of Global Real Estate Markets (March 2003). By combining country market risk and investment strategies,
we present a matrix that allows investors to determine hurdle rates of return
for a variety of circumstances.
• Sizing Up the US Investment Real Estate Market (January 2003). The potential investment universe far exceeds the actual
level of institutional investment because US institutions hold only a small
portion of the total value of US commercial real estate. The possible additional
investment from a combination of equity investing and mortgage lending totals
almost $4 trillion. Institutional investment in commercial real estate likely
will slowly increase through direct purchases, investment in REIT/REOC equity
and debt, and commercial mortgage/CMBS investing.
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