REIT Share Price Gains Well Supported by Gains in CRE Values

Frank Haggerty, senior vice president and portfolio manager with Duff & Phelps Investment Management, sat down with REIT.com at REITWeek 2011: NAREIT's Investor Forum to discuss the key issues facing REIT investors today and .trends to watch going forward.

Haggerty said he receives a lot of questions about valuations within the REIT market, adding that some clients express concern that with the strong recovery in the sector over the past 36 months that they may have missed the window of opportunity to take advantage of the upswing.

"What we like to point to is the significant recovery that we have seen in asset values of commercial real estate over the last year and a half on the back of a very strong credit environment. So the cost of capital has improved significantly for the broader commercial real estate environment, but also for the companies that we are investing in," Haggerty said. "On the back of that rebound in commercial real estate values we believe that the move in the REIT stocks themselves has actually been well supported with that reduction in risk premium and cost of capital."

Haggerty said there are two broad trends that he is keeping a close eye on. First, he said he is watching asset market trends, specifically transactions within the sector.

"We have seen a significant return of investor appetite to get into commercial real estate, particularly core real estate in gateway cities," he said. "That is what is driving a reduction in risk premium into the sector."

Secondly, he said he is watching the space market and the fundamentals of commercial real estate. Within the higher-tier properties in key markets, he said you are seeing fundamentals improve at a quicker pace than many people expected.

When clients are looking to invest in REITs or real estate in general, he said he advises them to view it from an asset-allocation point of view.

"It is not so much a tactical decision but something that is a strategic asset allocation to the space. We find that allocations to both direct real estate and public real estate securities are complimentary," he said. "They both offer positive attributes."

He said he advises clients to have an allocation between 5 percent and 15 percent to REITs, with up to 50 percent of that allocation earmarked for global real estate securities.

"That gives an investor the most broad and potentially best risk-adjusted exposure over time," Haggerty said.

By Carisa Chappell

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News & Politics

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