TIAA-CREF real estate fund vs. REITs

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TIAA-CREF real estate fund vs. REITs

Postby newstreetnj » Sun Apr 11, 2010 7:16 pm

Hello Friends,

Have some of the TIAA Real Estate Fund and am chagrined to see it sinking lower each quarter. Yet, REITs, in general, are doing very well. I realize that TIAA is mainly invested in commercial real estate but many REITs are too.

So, my question is why so much of a difference in performance between TIAA and the average REIT?

Thanks,in advance, for your thoughts.

Bob
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Re: TIAA-CREF real estate fund vs. REITs

Postby BruceM » Sun Apr 11, 2010 8:23 pm

newstreetnj wrote:Hello Friends,

Have some of the TIAA Real Estate Fund and am chagrined to see it sinking lower each quarter. Yet, REITs, in general, are doing very well. I realize that TIAA is mainly invested in commercial real estate but many REITs are too.

So, my question is why so much of a difference in performance between TIAA and the average REIT?

Thanks,in advance, for your thoughts.

Bob


If you are speaking of TRRSX, it seems to be comprised primarily or only of REITs (the top 25 of its 50 holdings are REITs) and its performance over the past couple of years has slightly outperformed its Commercial RE index while very closely mirroring Vanguard's REIT index, VGSIX...according to Morningstar.

There are some REITs (most likely those under the lights of the popular investing media) that have done quite well over the past year...but then there are REITs who have been significant underperformers, due largely to issues of the cost of credit and because commercial RE tends to lag the overall broad market.

One of the drawbacks of using an index for REITs is that the index must include the duds (like EGP and ACC) as well as the better performers.

Many who invest in individual REITs do so because CRE is a relatively slow moving and slow changing industry and REIT reporting is fairly transparent, meaning its relatively easy to spot those REITs in tight positions that will require time to correct vs. those REITs who are well structured and have stable rents.

So I don't think there is any reason to alter your position based on the slow changes in this industry index, as it is an excellent diversifier

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Re: TIAA-CREF real estate fund vs. REITs

Postby grabiner » Sun Apr 11, 2010 9:33 pm

newstreetnj wrote:Have some of the TIAA Real Estate Fund and am chagrined to see it sinking lower each quarter. Yet, REITs, in general, are doing very well. I realize that TIAA is mainly invested in commercial real estate but many REITs are too.

So, my question is why so much of a difference in performance between TIAA and the average REIT?


TIAA Real Estate holds real estate directly; REITs are traded on the stock exchange, so they follow the stock market as well as the real estate market. This makes TIAA Real Estate much less volatile.

TIAA Real Estate also lags the real estate market somewhat, as properties are revalued when they are appraised. It therefore peaked later than REITs, and has only recently stabilized (trading in a 1% range since 1/27/10).
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Re: TIAA-CREF real estate fund vs. REITs

Postby raywax » Sun Apr 11, 2010 11:11 pm

[quote="grabiner"

TIAA Real Estate also lags the real estate market somewhat, as properties are revalued when they are appraised. It therefore peaked later than REITs, and has only recently stabilized (trading in a 1% range since 1/27/10).[/quote]

The appraisal policy has changed. It use to be the external appraisals were done once a year but currently the TREA has an external appraisal (by Real Estate Research) done quarterly. There still is a lag but all things else be equal, it should be considerably less than it had been prior to the change in appraisal policy.

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Re: TIAA-CREF real estate fund vs. REITs

Postby Valuethinker » Mon Apr 12, 2010 4:04 am

newstreetnj wrote:Hello Friends,

Have some of the TIAA Real Estate Fund and am chagrined to see it sinking lower each quarter. Yet, REITs, in general, are doing very well. I realize that TIAA is mainly invested in commercial real estate but many REITs are too.

So, my question is why so much of a difference in performance between TIAA and the average REIT?

Thanks,in advance, for your thoughts.

Bob


If you own the RE annuity, then it is a private fund and properties are revalued with a lag.

REIT prices anticipate market trends, RE annuity unit prices do not.

It's probably a good long term hold at these levels, although you may see further unit price weakness.

Commercial RE assets are yielding back over 6% (having bottomed at 4%), generally, and you've seen some very smart money buying prime assets (typically foreign investors buying well let buildings in prime locations). I believe TIAA has a fairly 'blue chip' base of investments with secure tenants.
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Re: TIAA-CREF real estate fund vs. REITs

Postby DickBenson » Mon Apr 12, 2010 1:52 pm

Valuethinker wrote:It's probably a good long term hold at these levels, although you may see further unit price weakness.

Commercial RE assets are yielding back over 6% (having bottomed at 4%), generally, and you've seen some very smart money buying prime assets (typically foreign investors buying well let buildings in prime locations). I believe TIAA has a fairly 'blue chip' base of investments with secure tenants.


Is that 6% yield mainly from rental income, or does it include capital appreciation?

Is there any indication about the amount of leverage that these foreign buyers are using when buying these prime assets?

TIAA RE has almost $1 billion in real estate loans becoming due this year, almost all with rates of 5% or 6%. In the present climate, do you think that the lenders would want their cash, or would they prefer to have extensions of the maturity dates. If the latter, would you expect the loan rates to stay the same or to increase or decrease?

Similar question about lease renewals.

Dick
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Re: TIAA-CREF real estate fund vs. REITs

Postby Valuethinker » Tue Apr 13, 2010 3:54 am

DickBenson wrote:
Valuethinker wrote:It's probably a good long term hold at these levels, although you may see further unit price weakness.

Commercial RE assets are yielding back over 6% (having bottomed at 4%), generally, and you've seen some very smart money buying prime assets (typically foreign investors buying well let buildings in prime locations). I believe TIAA has a fairly 'blue chip' base of investments with secure tenants.


Is that 6% yield mainly from rental income, or does it include capital appreciation?

Is there any indication about the amount of leverage that these foreign buyers are using when buying these prime assets?

TIAA RE has almost $1 billion in real estate loans becoming due this year, almost all with rates of 5% or 6%. In the present climate, do you think that the lenders would want their cash, or would they prefer to have extensions of the maturity dates. If the latter, would you expect the loan rates to stay the same or to increase or decrease?

Similar question about lease renewals.

Dick


OK Cap Rates (yields) are all over the shop so you should do your own research on that-- don't take my word.

Cap Rate is net rent/ value of property (capital gain excluded).

On Commercial RE rollover that is the big quesiton fo the next 3 years and is likely to continue to depress values. ONe has to guess that TIAA is in better shape than most-- able to inject equity if necessary (the key test is the 80% Loan to Value covenant on loans). See Calculated Risk and various references there unto.

No doubt interest rates will rise over the levels prevalent in 06-07 when a lot of these deals were done. You could get a negative yield gap (Cap rate below the 5 year forward swap rate-- when you have a positive yield gap then leveraging in real estate is a money machine, vice versa deleveraging is indicated).

I think RE will go back to being boring, albeit volatile at the NAV level.
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