Done Deals: Realty Capital Markets' Main Investment Themes: Flight to Quality and Safety

Thursday, August 2, 2012

Realty Capital Markets' Main Investment Themes: Flight to Quality and Safety

CHICAGO, IL - Mortgage markets follow the law of gravity, moving downward without too much interruption. Funding sources are less concerned about returns, and more focused of return of capital with mortgages offering brick-and-mortar collateral vs. other types of investments.

Flight to quality and safety are the main investment themes in the realty capital markets based on the following discussion points:

Benchmark Rates - For now, no acceptable alternative to short-term indexes to replace the troubled LIBOR index. Despite problems, LIBOR remains a steady indicator for the markets to use for floating rate debt. On the longside of the yield curve, US Treasuries are in demand as investors fear major global economies are still fragile. Mortgage rates continue to hover at v ery low yields based on such benchmark rates -- the 10-year treasury hit a record-low level of 1.39% on July 24th.

CME Recovery - Demand for new U.S. homes fell in June from a two-year high, ndicating the housing recovery will be uneven. Thus, apartment properties are a really safe bet in the foreseeable future. Rising occupancy levels in most markets and increasing rents in the multifamily sector dampened overall levels of distressed sales, helping lift commercial property pricing. Various brokerage firms are nationally claiming high transactions volumes, the best performances since the Great Recession. More recently, the demand for lower-grade, smaller income properties is now approaching similar demand levels as seen for institutional-quality properties.

Competition - Everyone's in the funding arena for long and short mortgage dollars. Funding sources are all over the board, often overlapping. The banks moving into 10-year funding programs, while life companies enter the shorter-term, floating-rate programs as yields below 4% seem to shift interest away from funding long-term debt. But the biggest concern within the real estate lending industry is how to prudently invest in long-term debt based upon short-term interest rate trends. In other words, should balance-sheet lenders originate longer-term debt on their books only to lose money as rates rise beyond 2014 per Fed Policy statements?

The answer might be found on Wall Street. The Street remains the key marketplace for transferring rate risk to investors instead of holding mortgages on lender balance sheets. The mortgage conduit is definitely back. CMBS lenders aggressively bid for properties with owners seeking full leverage and longer amortization schedules. The pricing threshold still remains about 25 to 50 basis points higher than Life insurance companies and other traditional long-term nonrecourse lenders. However, a strong demand exists for this product as life insurance companies remain selective on the quality of their asset loan portfolio versus maximizing pricing.

Jeanne Peck (top right photo), the Research Director of the Real Estate Capital Institute, notes, "It's a mid-summer night's dream to be a borrower today. Low interest rates, ample availability of funds and lenders willing to finance wider range of properties as few other fund-type funding alternatives are available."

She adds, "The real question, to lend or not to lend with such ow interest rates?"

The Real Estate Capital Institute(r) is a volunteer-based research organization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries, bank prime and LIBOR.