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HFF Research Update for October 5, 2016: 2Q 2016 Asset Performance Review, High Yield Bond Signals

Wednesday, October 05, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

In life there are constants serving as the benchmarks we use to calibrate our own compass. For example, the Gregorian calendar was adopted on this day (-1) in 1582 by Pope Gregory XIII and remains the most widely-used civil calendar in the world.

In investment management, experts use indices such as the S&P 500, the Dow Jones Corporate Bond Index and the United States Treasury market to benchmark returns within their own portfolios. Immediately following the end of every quarter, we provide performance insight within each of these asset classes as compared to public (REIT) and private (NCREIF) real estate. The metric we use is total return, comprising income received and capital appreciation reported during the previous quarter, each taken as a percent of equity invested at the beginning of the period. Aggregating the results over various time periods, we can see how each asset compares to others in return performance.

Aggregate Total Returns Of Various Asset Classes Based on Hold Period Ending September 30, 2016
Aggregate Total Returns Of Various Asset Classes Based on Hold Period Ending September 30, 2016

As is plainly obvious in the above table, REITs provided investors with the best total return over the past year (+19.9 percent). Because NCREIF data for the third quarter isn’t yet available, we provide returns through June. Because of the timing of each year ending in September, we start to see equities show a very favorable performance given the hold periods begin in 2001, 2005, 2011 and 2015, with a few of these years immediately following significant value corrections in stock markets. Still, real estate performance looks very attractive on a relative basis.

Compounding Annual Total Return Of Various Asset Classes Based on Hold Period Ending September 30, 2016
Compounding Annual Total Return Of Various Asset Classes Based on Hold Period Ending September 30, 2016

Looking at the table from an annual compounding return basis, we see something less obvious in the first table: returns across most assets classes accelerating. There is much debate revolving around central bank policy and its creating artificially higher total returns with their NIRP/ZIRP monetary policies. Certainly it would appear real estate is no different than the stock market or corporate bonds in this regard.

Finally, the below graph provides a glimpse into a 15-year history of each asset class with year-to-year volatility set adjacent to the average annual compounding return. Treasuries enjoy little volatility in return over the 15-year period; in fact, they are the only asset class with beta registering lower than alpha. Real estate, meanwhile, enjoys a balance between the two metrics whereas stocks, bonds and commodities have suffered very high volatility in returns relative to the average yield they provide investors. So, not only is the overall yield attractive in our industry, the lack of volatility, especially in private real estate, relative to the returns is favorable.

15-year average return and volatility

It is clear real estate continues to enjoy the same “performance relativity” to other asset classes we have discussed in the HFF Capital Markets Overview for many years now.

What is the time?
What day is it?
What year?
In which direction are we headed?

Know your benchmarks.

Interest rates for October 5, 2016

Sources: HFF Research, Dow Jones Corporate Bond Index – equal weight investment grade corporate bonds; S&P Total Return Index – total return including capital appreciation, assumes dividend reinvestment; Bloomberg Commodity Index – annually rebalanced excess return index based on futures price fluctuation; Bloomberg Barclays – U.S. Treasury Index, measures U.S. dollar-denominated, fixed-rate, nominal debt on notes issued by the U.S. Treasury; FTSE NAREIT Total Return Index – non-timber, non-infrastructure REITs total return including capital appreciation, assumes dividend reinvestment

*National Council of Real Estate Investment Fiduciaries, including income and capital appreciation return, National Property Index returns dated year ending June 30, 2016

About Jimmy Hinton

HFF Jimmy HintonJimmy Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.





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