by Keith Jurow, Capital Preservation real estate Report
For nearly five years, I have offered compelling analysis that the so-called real estate recovery is an illusion. While this evidence has been largely ignored by Wall Street and the pundits, those who heeded my advice in an earlier article to sell certain REITs (VNO, GGP, SPG) and the ETF IYR fared well.
In this article, I will focus directly on the importance of knowing when to sell a real estate investment. I will also look at how the equity REITs I discussed in March have done.
Last November, I wrote an in-depth article about the dangers of euphoria for wealthy investors. I showed that there was a very widespread consensus that the real estate collapse of 2008-2010 had ended. Most investors were quite confident that they no longer need fear a repeat of that calamity.
Recent data shows that high net worth investors are more enmeshed than ever in this deadly web of optimism. Here is the first quarter 2015 asset allocation for the more than 300 wealthy members of Tiger 21.
Source: Tiger 21
The average allocation to real estate is now 29%. That is up by 2 percentage points from a year ago and is the highest since Tiger 21 began publishing its member asset allocation in 2007. Complacency of wealthy investors with their real estate portfolios is at dangerous levels.
Further confirmation of this euphoria comes from the results of Savills' latest Wealth Briefing survey, which came out in June. It reported that 91% of wealth managers and private bankers said their clients planned to either increase or maintain their direct real estate holdings in 2015. In addition, 87% intended to increase or maintain their indirect holdings. That is incredibly optimistic.
Why am I so concerned about the excessive bullishness of Tiger 21 members? Back in mid-2008, members had raised their real estate allocation to 26% just as the commercial real estate crash was commencing. Wealthy investors were not helped by their advisors, many of whom had maintained a bullish attitude throughout 2007. Risk management was not a high priority then. The portfolios of high net worth investors who were heavily allocated to real estate were subsequently smashed.
Were lessons learned from the real estate collapse?
Let's be very clear about this: Wall Street trains investors to buy, not to sell. Advisors and their clients need to be constantly reminded that Wall Street rarely makes a recommendation to sell an investment. After all, it got the appellation of “the sell side” for a reason. Wealthy investors had better look somewhere else for advice on when to sell.
Last year, I gave a presentation at a major conference in New York City on risk and liquidity. The title of my talk was “The Wisdom of Knowing When to Sell.”
For two days, I mingled with the institutional attendees to get a good feel for what concerned them. Their focus was on what to buy in their search for yield. Hardly a word was said about what to sell or when to sell holdings in their portfolios. That was the furthest thing from their minds. I suspected that getting across my key points in the presentation would be a challenge.
As I ran through my presentation about risks that institutional investors were probably not aware of, I scanned the room for reactions from the audience. What I saw was a stunned “deer-in-the-headlights” look. What I was saying was important for their portfolios, but they were too shocked to show much response.
In the last part of my presentation, I explained my views about selling. Having observed markets for a long time, I had seen over and over again that the exit door for large institutional investors is very narrow. I emphasized that this door could close very quickly and made it very clear that the only safe exit for large institutions is to sell sooner rather than later.
Feedback from attendees was positive, yet I doubted that many would take any action. Why not? They were at the conference to find out what to buy, not when to sell.
Timing matters to investors
We hear a lot of talk these days that trying to spot the top of a market is a losing proposition. Perhaps, but that is really a straw man. No one can really call the absolute top of a long-term bull market. The wise thing is to sense that a market is excessively risky and that valuations are no longer connected to fundamentals. To decide that selling off some or all of one's holdings and raising cash levels is a prudent precaution in that environment.
