Wealthy Americans invest in commercial property

High-net-worth individuals invested $2.1 billion in commercial real estate last year, more than three times as much as 2009.

03/10/2011


When Sumeet Parekh bought a $6 million retail property in Manhattan’s TriBeCa neighborhood in January, individual investors provided about a quarter of the financing. The wealthy investors contributed increments of $100,000 to $625,000 in hopes of a 10% annual return and a portion of the building’s appreciation, said Parekh, a principal at HP Investors, which owns and invests in commercial properties.

High-net-worth individuals invested $2.1 billion in commercial real estate last year, up from $579 million in 2009, according to Real Capital Analytics Inc. Apartments were the properties most sought after by investors last year, accounting for 32% of deals they were involved in.

“Commercial property looks damn attractive versus other asset classes right now,” said Dan Fasulo, managing director at Real Capital. “Everyone’s looking for some form of inflation protection. They’re buying gold, they’re buying oil, or you can buy property. It has inflation protection characteristics, plus it gives you a check every month.”

Prices for commercial property have dropped 42 percent since their peak in October 2007 through December, according to the Moody’s/REAL Commercial Property Price Index. The index posted gains in three of the last four months of 2010 as individual and institutional investors bet on a rebound.

Low yields on other investments are driving investors to real estate, said Robert Knakal, chairman of the commercial property brokerage Massey Knakal Realty Services. “Look at what your options are: Are you going to buy a CD and get 50 basis points on your money? Or buy a 10-year Treasury and get 3.46%?” he said.

The average capitalization rate on commercial properties excluding hotels was 7.2% as of the fourth quarter last year, Real Capital data show. Cap rates are a property’s net income divided by the purchase price.

Comparatively, investment-grade U.S. corporate bond yields were 4.01% as of March 7, according to the Bank of America Merrill Lynch index. Rates for 10-year certificates of deposit averaged 1.48% as of March 7, according to Market Rates Insight.

Clients from athletes to entrepreneurs have moved 3 to 5% of their cash into real estate deals in the last year as a way of adding assets that may protect portfolios from inflation and stock market volatility, said Rick Flynn, head of Rothstein Kass, an accounting and advisory firm serving those with a net worth of at least $10 million.

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- Edited by Bettina Chang, Consulting-Specifying Engineer, www.csemag.com



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