Real estate well positioned if rates rise

Bob Zenouzi
Chief Investment Officer – Real Estate Securities and Income Solutions (RESIS)

Real estate well positioned if rates rise

Well, remember what causes rising rates, there are two reasons why rates go up. One is rising GDP, so a good economy and two is pure inflation, without a rising economy. So, in the first case, when GDP is rising and the economy is doing well, we want to expose, and structure our portfolio more toward cyclical companies that can participate in that strong economy. So in this case, we would be buying short duration lease companies — hotels, for example, can reprice their assets every night; self-storage companies on a monthly basis, and apartments on an annual basis.

Conversely, we want to underweight the longer duration lease companies. So, even though health care companies and triple net companies have very stable cash flows, they can’t reprice in a rising rate environment, when GDP is going higher.

Lastly, in terms of inflation with very little growth, that’s sort of similar to what we’re seeing in the emerging markets. So there, there isn’t one particular asset class we’d be buying, but it’s more company-specific and we want to be careful about which companies we buy there. So, we want companies that have termed out their debt, have low-cost debt, very little debt maturities in the short- to intermediate-term. And then, those companies that have good pricing power, where there is low supply and can endure higher inflation.

The views expressed represent the Manager's assessment of the market environment as of April 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

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Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors. REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations. A REIT’s fund’s tax status as a regulated investment company could be jeopardized if it holds real estate directly, as a result of defaults, or receives rental income from real estate holdings. “Nondiversified” Funds may allocate more of their net assets to investments in single securities than “diversified” Funds. Resulting adverse effects may subject these Funds to greater risks and volatility.

A triple-net lease refers to a lease agreement in which the tenant is responsible for all of the costs relating to the asset being leased as well as the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance.

Gross domestic product is a measure of all goods and services produced by a nation in a year.

“Nondiversified” funds may allocate more of their net assets to investments in single securities than “diversified” funds. Resulting adverse effects may subject these funds to greater risks and volatility.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

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