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| Product Focus |
| January 2005 |
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| Robert J. Greer Discusses the RealEstateRealReturn Strategy |
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Robert J. Greer
Senior Vice President
Product Manager for PIMCO's RealEstateRealReturn Strategy |
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Click here for Robert J. Greer's biography.
With inflation slowly rising and returns from financial assets expected to remain modest this year, many investors are considering alternatives, including real estate. PIMCO’s RealEstateRealReturn strategy is designed to offer the benefits of real estate investing combined with potential protection against inflation. We recently discussed PIMCO’s approach to real estate investing with Product Manager Robert J. Greer.
Q: Given the rise in real estate values in the past few years, is real estate still an attractive investment in the current environment?
Greer: Real estate is all about location, location, location—and the rental income that is derived from assets in that location. As the economy slowly improves, there is typically more demand for rental space and therefore you would expect rental income to increase.
At the same time, interest rates are slowly rising. Most real estate held by REITs [Real Estate Investment Trusts] is leveraged to a certain extent, probably around 50%, but the rates on that financing are typically fixed for a period of a few years at least. Therefore, there should not be an immediate impact from a rise in interest rates as it relates to cash flow from real estate.
On the other side of the coin, however, if real estate can be expected to generate a steady source of cash flow, then as yields on most investments generally rise in the marketplace, those steady cash flows might be worth a bit less. So the bottom line is: in an improving economy with rising rates, the demand for bricks and mortar may increase, but that might be partially offset by rising interest rates which could impact the relative attractiveness of real estate yields.
Q: To provide investors with exposure to real estate, PIMCO offers the RealEstateRealReturn strategy. How does the strategy work and how is it different from other approaches to real estate investing?
Greer: Rather than owning real estate or even owning REITs, which own commercial real estate, PIMCO has utilized its core competencies of derivatives management to give asset class exposure and active collateral management to add value to the financial assets that back its derivatives exposure.
In the RealEstateRealReturn strategy, we negotiate swaps on an index of REITs, and the collateral we utilize to back those swaps is a portfolio of TIPS. Our thought is that an investor in real estate is looking not only for diversification and growth but also for an inflation hedge, and utilizing TIPS as the collateral to back the real estate index swaps would be the logical way to employ that capital.
This approach is different from that of other real estate managers in that PIMCO does not actively own and choose REITs. The value we attempt to add is from our core competency of collateral management. Other REIT funds-of-funds rely on the managers’ ability to pick and choose shares of individual REITs, which may be undervalued or overvalued.
Q: What types of investors could benefit from the strategy?
Greer: Because real estate has typically provided real returns—i.e., returns in excess of the CPI [Consumer Price Index]—an investor concerned about inflation might benefit from having an exposure to real estate in the form of REITs, or in our case, in the form of a REIT index.
In addition, the return from real estate in the last several years has not been highly correlated with the returns from stocks and bonds, and therefore the asset class provides some diversification to a portfolio as well.
Q: You mention real estate as a means of diversification. Don’t investors already have sufficient exposure to real estate if they own their own homes, which, for many, may be the largest single investment they have?
Greer: The value of a person’s home may increase or decrease based on very local market characteristics—overbuilding or undersupply, for instance. The value of that home is not really a function of the revenues it might generate as a rental property.
Furthermore, owning a single-family home in one area is very different from owning exposure to a diversified portfolio of income-producing commercial properties. It is the latter to which investors can gain exposure by using a REIT index, which is what our product is benchmarked to.
Q: What index serves as the benchmark for RealEstateRealReturn?
Greer: The strategy is benchmarked to the Dow Jones-Wilshire REIT index, which is composed of the returns of about 90 public, actively traded equity REITs. These REIT shares collectively represent more than $217 billion in market capitalization and cover a broad range of property types from multifamily apartments and retail stores to office buildings and industrial properties. The index indeed measures the rental returns on property held in a wide range of locations, locations, locations.
Q: Thank you for discussing the RealEstateRealReturn strategy. |
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This publication contains the current opinions of the manager and does not represent a recommendation of any particular security, strategy or investment product. Such opinions are subject to change without notice. The distribution of this presentation is for informational purposes only and should not be construed as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed reliable, but not guaranteed.
The use of derivative and real estate-linked derivative instruments may subject a portfolio to greater volatility than investments in traditional securities. Derivative instruments may involve certain costs and risks such as liquidity risk, interest rate risk, market risk, credit risk, management risk and the risk that a fund could not close out a position when it would be most advantageous to do so. Investments in a real estate-linked derivative instrument that are linked to the value of a REIT may be subject to additional risks such as poor performance by REIT manager, adverse changes to the tax laws or failure to qualify for tax-free pass-through of income. Portfolios investing in derivatives could lose more than the principal amount invested. Inflation-indexed bonds issued by the U.S. Government, also known as TIPS, are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. Repayment upon maturity of the original principal as adjusted for inflation is guaranteed by the U.S. Government. Neither the current market value of inflation-indexed bonds nor the value a portfolio that invests in inflation-indexed bonds is guaranteed, and either or both may fluctuate. Diversification does not ensure against loss.
No part of this presentation may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660. ©2004, PIMCO. |
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