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Opportunities in US real estate, says Schroders

Another year and a half of depreciation in US real estate is likely but heavy discounts to net asset value on stocks offer an “arbitrage” opportunity for investors, says Schroders.

Speaking at a Schroders conference in New York yesterday, global property securities fund manager Jim Rehlaender said many Reits are already discounting the deterioration in fundamentals.

Rehlaender is managing director and principal of European Investors Inc, the investment manager for Schroders’ £360m global property securities funds.

The UK and Luxembourg domiciled funds invest directly in real estate through the shares of actively managed real estate companies. The UK-domiciled unit trust, like much of global real estate, has been directly hit by the credit crunch and is currently underperforming its global property securities benchmark index by 1.3 per cent delivering – 19 per cent since its inception in late 2005 to October 31, 2008.

He said: “There is a good arbitrage opportunity between how the stock market values real estate and how it is valued on a fundamental basis. We’re looking at another year to year and a half of depreciation in the US market but the stocks have discounted a lot of that already and are typically ahead of the turning point in the underlying economy by about 9-12 months.”

Rehlaender believes the real estate market has oversold by 20-30 per cent but is confident that reduced construction of new space and fiscal stimuli will help the sector stage a recovery.

He said: “The biggest problem in real estate is not interest rates or economic growth, it’s supply. I’d be much more worried if we had a lot of new supply getting delivered because the decline would be four or five years like that in the US in the late eighties. This time I don’t see a lot of space overhang so I’m not as concerned.”


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