02-13-2008, 02:37 PM
A potential concern is that property ownership is falling. Also known as capitalization rates, yields have dropped over the past three years to near-historic lows. While this is the natural outcome of higher prices capital rates are the ratio of a propertyâs yearly income to purchase it can also indicate that operating income hasnât kept pace with the higher prices. This can make real estate less attractive to investors primarily interested in the cash stream.
There was huge overbuilding in the late 1980s which really hurt the market when we had a recession. But for the most part Real Estate in Kerala did not get overbuilt before the last downturn. Nor do developersâ plans seem excessive. One reason is that banks have become more conservative in their lending, requiring developers to show that their buildings will be fully leased. Another is that the soaring price for concrete and steel has made new construction costly. While higher rates can dampen the real estate market by raising borrowing costs, rates remain at historic lows. Relative to historic pricing, real estate is pretty expensive, and thatâs something that should make everyone think hard. The Federal Reserve has signaled its intention to increase rates gradually; about a quarter points per quarter, but this may not be enough to ward off buyers.
Largely because of this comparatively attractive income stream, the institutional investors are unlikely to abandon the market. This may be true even if cap rates fall farther. Because institutional investors often pay with cash, they can accept lower cap rates without interest payments, their effective yields are higher that those of more leveraged buyers. Professor says that TIAA-CREF has no plans to reduce its exposure to real estate. âWe donât play the short game. For us, the question is, âWhat makes sense for our participants?â And the answer is to stay well diversified and active in all markets.â
Thereâs always the risk of some broader meltdown that would bring down the real estate market along with stocks and bonds. In this case, an investor would be wise to be in the asset thatâs the least overvalued to begin with i.e., commercial real estate.
There was huge overbuilding in the late 1980s which really hurt the market when we had a recession. But for the most part Real Estate in Kerala did not get overbuilt before the last downturn. Nor do developersâ plans seem excessive. One reason is that banks have become more conservative in their lending, requiring developers to show that their buildings will be fully leased. Another is that the soaring price for concrete and steel has made new construction costly. While higher rates can dampen the real estate market by raising borrowing costs, rates remain at historic lows. Relative to historic pricing, real estate is pretty expensive, and thatâs something that should make everyone think hard. The Federal Reserve has signaled its intention to increase rates gradually; about a quarter points per quarter, but this may not be enough to ward off buyers.
Largely because of this comparatively attractive income stream, the institutional investors are unlikely to abandon the market. This may be true even if cap rates fall farther. Because institutional investors often pay with cash, they can accept lower cap rates without interest payments, their effective yields are higher that those of more leveraged buyers. Professor says that TIAA-CREF has no plans to reduce its exposure to real estate. âWe donât play the short game. For us, the question is, âWhat makes sense for our participants?â And the answer is to stay well diversified and active in all markets.â
Thereâs always the risk of some broader meltdown that would bring down the real estate market along with stocks and bonds. In this case, an investor would be wise to be in the asset thatâs the least overvalued to begin with i.e., commercial real estate.