Real Estate Market Commentary – November 2013

One year ending November 13, 2013, the average global non-listed real estate vehicles realized a total global return of 5.82 percent[1], as measured by the Global Real Estate Fund Index. The U.S. as a whole was the strongest performer, with an increase of 11.33 percent. The strong performance was primarily driven by improved real estate market conditions and the use of cheap debt rather than by risk exposure.

In the U.S., the private real estate properties sectors returned 2.59 percent in the third quarter of 2013, indicated by the NCREIF Property Index. Regionally, the south region exhibited the best performance. At the sector level, among the commercial real-estate categories, the industrial centers are currently experiencing the highest demand, due to a large decrease in nationwide vacancy rate; as a result, the sector generated the best performance relative to other sectors during the period.

Real estate is a highly heterogeneous asset, no matter from the standpoint of locations, designs, lease provisions, or from the standpoint of cash inflow streams. The heterogeneity is particularly troublesome when making real estate planning and conducting investment due diligence. Investors should be aware that the transaction costs and the expenses associated with operations, management, and maintenance in real estate investing are significant compared with other alternative asset classes. Beyond that, the sale price of real estate properties varies widely from its true economic value; investors with poor-quality information should realize that transactions in relatively inefficient markets might systematically generate inferior returns.

The new 2013 top marginal income tax rate currently stands at 39.6 percent for single taxpayers earning over $400,000. Without thoughtful real estate investment planning, investors who sell valuable and pricey properties could be hurt since the income from the sale would push them into a higher tax bracket at a time when rates for those top brackets are going up.