Monday, December 27, 2004

Writer sees real estate investment cycle ending

The Business Journal, Phoenix

Despite the excellent performance for real estate investments over the past five years, it still remains a cyclical investment and the cycle is beginning to turn, a Valley real estate writer said Monday.

Steve Bergsman of Mesa, the author of "Maverick Real Estate Investing: The Art of Buying And Selling Real Estate Like Trump, Zell, Simon and the World's Greatest Landowners," said that as interest rates climb, the number of investors looking to make a commercial real estate deal will decline.

Bergsman said he bases his conclusions on a number of interviews he's conducted with national-level real estate investors.

Investors disappointed in the stock and bond markets have been pouring millions of dollars into real estate investments of one sort or another since the dot.com implosion, according to Bergsman. It has been a good bet, Bergsman said, citing a 9 percent decline in the S&P500 over the past five years, while an investment in real estate investment trusts averaged a gain of 14.5 percent over the same period of time.

And it is not just real estate funds, Bergsman said. Investors have been buying individual properties, everything from small shopping centers to summer homes, where the median price of second homes jumped from $162,000 in 2001 to more than $190,000 in 2004.

This not a market with gloom on the immediate horizon, said Bergsman. "They're expecting a very good year again" in 2005, he said.

However, with so much capital pouring into real estate, the price of individual properties continues to rise, according to Bergsman. While this has been happening over the past few years, investments were still worthwhile because the cost of money was so cheap. With interest rates rising and cost of capital increasing, many deals will no longer make sense, he said.

Other warning signs Bergsman cites include very low cap rates (the rate of return a property will produce on the owner's investment), saying that makes deals great for sellers but expensive for buyers.

Also, one of the reasons real estate has done well has been the flight effect. With the stock and bond markets inconsistent, real estate looked like a great alternative. But, Bergsman says, a lot of that capital inflow is transient money which will move elsewhere as the stock market picks up steam or the next great investment bubble begins. When the transient money leaves, real estate prices will decline dramatically.

Perhaps the most important trend line to watch is how the major real estate investors are moving their money. Bergsman, whose book was published in January and who has had articles published in the Wall Street Journal real estate section and in other magazines, said that those that have made millions in the market invest against the trend lines. They sit out the periods of ecstatic price increases, wait for the bubble to burst, then come into the market to pick up the pieces -- very cheaply. They buy when real estate is cheap, not when it is expensive.

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