REAL ESTATE’S PLACE IN WEALTH MANAGEMENT AND FINANCIAL PLANNING

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As many investors know, a diverse portfolio is the cornerstone of success. And today, even in a down market, commercial real estate is an important component for many investors. Recently in Atlanta, Interface Conference Group brought financial planners and real estate experts together to discuss the state of the commercial real estate market and investing today.

The conference — Real Estate’s Place in Wealth Management and Financial Planning — began with a frank, informative keynote address from Zachary Taylor, group chairman and managing partner of global wealth management firm Taylor, Fréres & Cie, a multinational concern with businesses spanning the commodities, asset management, and investment banking sectors.

Taylor’s initially set out to identify the role of commercial real estate in the crafting and management a modern portfolio — it should comprise between 20 and 30 percent in total — noting that the act of doing so has changed considerably over the past 3 years. “Financial planners need to step back and understand where capital is and what is driving it, in order to keep the wealth management business moving forward,” he noted.

Taylor, Fréres & Cie’s philosophy ensured that Taylor was particularly suited to address the crowd of nearly 200 attendees hailing from the wealth management and real estate industries. The firm focuses more heavily on alternative investments, such as real estate, as opposed to stocks and bonds, which Taylor views as more volatile.

“Real estate and additional alternative investments are the key to crafting ideal portfolios,” Taylor explains. “They generate higher returns across the board for the same or less risk, if managed properly.”

Having a proper manager of any real estate investment into which a financial planner is placing their client’s money is the first rule when investing in real property. A sound, well-performing real estate asset can turn out poorly if the team in charge of the property fails to manage it adequately, so properly vetting those in charge of the asset is of the utmost importance.

Taylor also outlined the advantages of real estate as a piece of any portfolio, as well as distinguishing which types of investments offer the most potential. “It is, has always been, and will always be a great diversifier, a great stabilization tool. It has almost no correlation to the equities markets, so there are few better ways to even out volatility and protect some returns than real estate. That said, it is all about carefully choosing the proper real estate,” he says.

The first thing wealth manager’s must do, according to Taylor, is shed the “mystique” that surrounds commercial real estate, as it has long been a business based on “gut-level” decisions, as much as it is built upon solid due diligence. Moving forward, the industry is much more driven by the analytical side, as the financial market more conservatively manages the underwriting process. “Real estate is driven by the same fundamental characteristics, the same drivers, as every other asset you invest in everyday, so understanding the risk and value drivers is key,” Taylor notes. “The business is all about risk — now more so than ever. This market represents a de facto risk mitigator, as we can now limit risk at the outset by using the current market conditions to drive yield on less risky deals.”

Taylor noted that expectations over the next 12 to 18 months will realize the long-term nature of the investment, but cautioned that as the market turned around, investors might once again assume quicker windfalls than real estate should be expected to provide.

Before a lively question and answer session, Taylor concluded by addressing the new reality the wealth management and real estate industries are facing in the wake of the recession. “It all boils down to a sea change that has occurred across all investing, which is that it is all about asset-specific equations. As we shed the mystique around real estate, it is about returning to realistic expectations for both returns and horizons.”

“I think it’s an exciting conference. This is the best I’ve ever attended. The topics discussed, the panelists and the detail were all of high quality. Atlanta is a wonderful location and the there was quality in the conference all the way around.”

— Ann S. Sanders, majority manager/owner of S & S Associates, LLC

Commercial Real Estate 101 — A Fluid Environment
The commercial real estate environment has always been cyclical, but right now it can only be called fluid as it changes on a daily, weekly and monthly basis. Panelists Ashby Hackney, principal with River City Capital; Jonathan Hipp, president and CEO of Calkain Companies; and James Brennan, principal and corporate counsel for Exchange Solutions Group, provided a general overview of the current commercial real estate market and what factors are affecting it.

Cap Rates & Debt
As the price of commercial assets continues to drop, potential investors are left wondering about not only the current state of the market but also where is it headed and if now is the time to invest. Hackney notes that because of the current economic issues it is imperative to look at cap rates to really understand if a deal will work now and in the future.

“Over the last couple years we have enjoyed an almost unprecedented drop in cap rates, and although real estate is a cyclical industry, what we are looking at right now is an unprecedented time where no one knows where cap rates are going to go,” he explains. “I think it is safe to say that they are going to continue to go up.”

Another issue causing problems for investors is the lack of available debt.

“Over the last 5 to 6 years, debt was readily available, it was very cheap and it was a primary driver of real estate valuation,” says Hackney.

With the lack of available debt and the essential death of the CMBS market, investors are left wondering how to finance new deals and refinance existing properties. Hackney points out that although government backed programs such as TALF and the Legacy Asset Program are trying to address this issue, but while they may be good in theory these programs might not meet the actual needs in the marketplace.

“TALF is geared toward helping people buy new issuances of CMBS debt, but frankly that is not going to come back until the issuers can make money,” says Hackney. “Then the question is going to be how are we going to get issuers to restrict their underwriting, and how are we going to penalize them for poor underwriting if they do move back that way?”

The legacy asset program is designed to help public and private groups buy toxic loans off the balance sheets of institutions. Hackney explains that while it again is a good idea in theory it might not provide relief since banks don’t want to take the write down and from a buyer’s perspective it is difficult to quantify what that loan is really worth.

Stricter Underwriting Standards
However, that is not to say that financing is not available in today’s market. One of the best sources for financing today are the local and regional banks and the life companies. However, because of the current is

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