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Wealthy Investors Flock to High-Risk Real-Estate Funds

By    |   Thursday, 23 August 2012 07:29 AM

Wealthy investors are embracing high-risk real-estate funds offered by private-equity firms, as institutional investors concerned about safety shy away.

Big-time firms, including Starwood Capital Group, Lone Star Funds and Carlyle Group, have brought in billions of dollars from individual investors in recent months for their latest real-estate funds, The Wall Street Journal reports.

The funds purchase or develop riskier properties and deploy high leverage in search of above-market returns.

Indeed, the main selling point of the funds is that they aim for returns of 15 percent or more, which dwarfs the 1.72 percent 10-year Treasury yield and the 3 percent or so yield on high-grade corporate bonds.

In addition, the funds are purchasing real estate at depressed prices, as opposed to bonds near record-low yields, or stocks that are arguably at least fully valued.

Institutional investors have grown leery of risky investments since financial markets crashed in 2008-09. "In their place, you've seen high-net-worth investors," Starwood CEO Barry Sternlicht tells The Journal.

While institutional investors take their time appraising an investment, individuals “are very fast, flexible and intuitive," he says.

These are investors with a net worth of at least $5 million who are putting in at least $250,000 into the funds.

Even industry titan Blackstone Group, which has had no difficulty recruiting institutional investors for its latest real-estate fund, has gone to individuals for more than $1 billion of the $13 billion fund, knowledgeable sources tell The Journal.

The investors are coming from all over the world and increasingly from Asia, private bankers tell The Journal. Given the strong growth of emerging-market economies in recent years, it’s likely the investor base will continue to grow there.

Experts recommend that all individual investors include real estate as part of their portfolio – generally 5 percent to 15 percent.

The easiest way for individuals to invest in real estate is through real-estate investment trusts (REITs). “They give you a diversified exposure to real estate, and are the most economical way for investors to get that exposure,” Mark Senseman, an investment specialist at Strategic Wealth Associates in Phoenix, tells Bankrate.com.

Just beware that REITs already have experienced an amazing run during the past 3 1/2 years, so many now stand at pricey levels.

Still, many experts think healthcare REITs have a lot of upside potential, thanks to the astronomical growth of healthcare spending, which should continue as more baby boomers turn grey. Among the healthcare REITs most recommended by analysts are Ventas (Ticker: VTR), HCP (HCP), and Health Care REIT (HCN).

Home builder stocks represent another vehicle for investing in real estate. Toll Brothers (TOL) shares just hit a five-year high after the company announced better-than-expected earnings for the quarter ended July 31.

You can also buy homes or apartments and then rent them. But that obviously takes a lot more effort – and carries a lot more risk – than simply clicking the buttons of your computer to buy a REIT or housing-related stock.

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Thursday, 23 August 2012 07:29 AM
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