As I wrote in my previous article, 2006 was the year of the private investor. Will 2007 be another year for the private investor? Equity funds and institutions have recently surpassed investments from private investors. This trend is unlikely to slow anytime soon since pension funds still report a great deal of pent-up investment demand. But many players thought that private investors would be the first group of buyers to decrease their investment activity when interest rates rose early in the year, since most of their acquisitions are leveraged. Interest-only loans have helped leveraged buyers absorb higher interest rates. Some lenders are offering interest-only loans for the term of a loan for up to 10 years. In addition, anticipated rent growth has allowed many private buyers to continue investment due to the future returns expected rather than on current yields.
Private capital should continue to flow into real estate despite rising interest rates for additional reasons. First, the diversification of portfolios away from stocks and bonds is likely to persist since real estate is still outperforming alternative investments. An associate of Goldman Sachs in their Wealth Management Group recently informed me that he is investing the majority of his clients’ money in private real estate funds rather than stocks and bonds. Second, investors are seeking ways to hedge against inflationary fears. Third, interest rates have come back from their recent highs and are now back to levels very similar to those reported one year ago. This recent drop has reenergized the wave of capital flowing into real estate.
In 2006, real estate investors benefited from a run of unprecedented appreciation in income producing properties. Investors enjoyed lower mortgage payments and in most cases were able to sell or refinance their properties providing greater returns on investment than originally anticipated. Most investors expect interest rates to rise which would increase mortgage payments, thereby decreasing the annual net income from their properties. The anticipated increase in mortgage payments can be offset by improving revenue generated by properties through leasing and asset enhancement. The commercial real estate market in most areas should continue to experience rising occupancy rates and increasing rental rates producing the revenue growth for property appreciation. Interest rates are not expected to rise substantially and returns from the stock market cannot possibly parallel those of the mid to late 90’s. Unless one of these events occurs, investment activity from the private investor should remain strong in 2007.
Commercial real estate investment is no longer for the experienced real estate professional. These individuals are engaging experienced real estate brokers to assist them in the acquisition, management, and leasing of income producing properties. These individuals can also invest in opportunity funds managed by experienced professionals which acquire real estate and provide passive ownership interests to their investors. Fickling & Company can assist you in your search for capital to fund any of your future transactions.
Mysers St. George
Aqusitions and Investments
Macon Commercail Office