Higher Yield Preferences Expand Risk Tolerances
Chicago, IL -- (ReleaseWire) -- 10/22/2007 -- Despite real estate debt market turmoil, overall equity yields for income properties remain near 40-year-lows. While bargain-hunting abounds in the residential arena -- particularly new condominium developments in overbuilt metro areas, investors still crave for high-quality, income properties. While the mode is cautious and selective, funds are readily available as public funds, private capital, foreign buyers and tax-exchange players aggressively hunt for Class-A properties -- assets with strong cash flow and upside potential.
Key equity market highlights are as follows:
• Players - institutional investors represent some of the most competitive yield guidelines for existing, stabilized properties based on longer-term hold strategies of five years or more.
• Yields - Overall yields are below ten percent. Core assets yield about 7% to 8%; Core Plus properties trade in the 8%-9% range. Opportunity plays trade with yields of up to 12%.
• Alternative Property Types – Conventional property types (apartment, industrial, office and retail) generate slim yields prodding investors to expand into alternative risk profiles. Lodging, self-storage, manufactured housing, senior living and recreational projects are among the choices gaining strong consideration. However, financing and operational considerations propel yields of at least 15% or more above conventional assets.
• Replacement Cost Thresholds - Often, Class-A property prices flirt with replacement costs as investors pay premiums for outstanding infill locations, preferring to avoid construction risks. New construction opportunities are becoming more attractive, especially in those markets with substantial supply constraints (e.g., San Francisco). Depending on preleasing economics, overall investment yields for the best-quality new construction projects are in the lower-to-mid teens.
According to the Real Estate Capital Institute®'s research director, Nat Zvislo, "While overall equity yields remain low and financing is more challenging, real estate investing still offers better returns compared to many stock/bond prospects."
The Real Estate Capital Institute® studies realty equity and debt data for income properties. Information is updated daily on website (http://www.reci.com). Mortgage interest rates and indices are updated hourly via the Real Estate Capital Rateline (773-227-4825).