A feeling of gloom is affecting the real estate market in the view of many
people.
But, like the stock market, the real estate market consists of several sectors.
In the stock market, the two most fundamental sectors are "growth" and "value."
Sub groups, such as small and large cap, exist within each sector.
In real estate, the main sectors are residential and commercial. Sub groups like
condo/home and office/retail exist within each sector.
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Like the stock market, it is often a mistake to view the whole real estate
market as one homogeneous group. Focused asset allocation is crucial.
In today's real estate, the residential sector appears to be in trouble.
According to the National Association of Realtors, existing home sales fell some
0.5 in August from July while supply of homes for sale continues to climb to an
all-time of 3.92 million units.
The median August price for a single-family home sank by some 1.7 percent, from
August 2005. The median condo price sank even further, by 2.4 percent. These
median price falls are the first for 11 years and the second largest in 38
years.
[Editor's Note: Sir John Templeton first warned housing prices could
crash 50 percent. Discover how to protect yourself and even profit from the
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There has been massive speculation in residential real estate. It now appears to
be unwinding.
Commercial real estate is a distinctly separate sector. Most importantly, it is
based more upon hard-nosed commercial judgment and less upon amateur emotion.
Commercial owners of real estate also tend to be better funded and more able to
ride out market weakness and periods of high interest rates. Real estate is a
long-term investment. For long-term success, it therefore requires long-term
funding.
It is interesting to note that in last month's listing of Forbes 400 Richest
Americans, some 39, or 10 percent of the listed billionaires, made their main
fortunes in real estate. If those who made their money primarily in real estate
related fields (such as hotels) are added, the figure rises to 64, some 16
percent or one-in-six of the top 400. That's based only on their main source of
wealth creation.
Commercial real estate is well known not only as a source of income, but also as
a store of value over the long term.
We believe that today's inflation figures are distorted on the downside and that
what we term as stealth inflation is with us, more than our government
statistics show. We therefore believe that there is good reason for commercial
real estate to be rising, over and above reasons of supply and demand.
It is therefore not surprising to see that, while residential real estate is
falling, commercial real estate is booming, reflecting economic growth.
As one spin-off of global trade, commercial real estate is rising worldwide,
particularly in the great international market centers such as London and New
York. Investors, interested in real estate, should be careful to observe the
time honored real estate maxim, "location, location, location." They should
consider, for instance global investment in companies with high-grade portfolios
in prime office areas such as Manhattan (SL Green Realty) and London (British
Land).
Editor's Notes:
