With Michael Torres, Chief Executive Officer and Portfolio Manager of Adelante Capital Management
A great change is on the horizon for investors and possibly an even bigger change for the real estate industry. Some refer to this coming event as the “Big Bang”.
Michael Torres, Chief Executive Officer and Portfolio Manager of Adelante Capital Management, says that before explaining this impending event, it’s important to analyze some of the basics.
First, he explains, there are only two types of investing: either you own something or you lend money.
Real Estate Investment Trusts—commonly known as REITS— represent ownership of real assets. With that ownership come all the possibilities of reward and risk. In one sense, you can say that it is a direct ownership in the many different types of real estate investments. By putting together a number of REITS from different areas of the real estate market, one can reduce risk through diversification and hopefully benefit from the positive economics occurring in different parts of the real estate industry.
One downside when investing in individual properties on your own is lack of liquidity. If you buy a duplex, condo, or any property as an investment, it’s not easy to sell quickly or to liquidate, if necessary. Publicly traded REITS, on the other hand, are very liquid and can be sold at a moment’s notice.
Now to the BIG Bang. Prior to this month, August 2016, investing in a diversified portfolio of real estate through index funds had not been possible. That’s about the change. Real estate investments will now be separated from all other financial index funds and put into their own unique fund, which will open the door to investing specifically in a broad range of real estate investments at a very low cost and high liquidity.
This may have the effect of attracting more capital to the industry, making it easier for pension plans and large investors to benefit from the sector. Generally speaking, more capital is good for everyone.
Finally, Michael puts forth the new concept that, in fact, owning real estate is a way of investing in the housing of the economy, so that over time, as the economy does well, the companies that house the economy should also do well.
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Steve Pomeranz: You know coming very soon there's going to be what I refer to as a big bang in the real estate market. Now this is not a scary kind of big bang, it doesn't mean that the world is falling apart and that real estate is going to the dogs. In fact, I think it's going to be quite the opposite. To talk about it, I've invited a man with 30 years of expertise, he's Chief Executive Officer and Portfolio Manager for Adelante Capital Management, and he's the person who was instrumental in creating one of the major indexes for real estate, the Wilshire Real Estate Securities Index. With me is Michael Torres, welcome to the show, Michael.
Michael Torres: Great Steve, great to be with you.
Steve Pomeranz: The real estate market is made up of many different kinds of investments. Let's list some of them to begin with. Many people have heard of REITs, or real estate investment trusts. What are they?
Michael Torres: Real estate investment trusts are no different than any other corporate organization. However, they must make a tax election, so it's an enterprise, whether it be public or private, that makes an election which allows them to forego paying corporate taxes provided they finance or own commercial real estate.
Steve Pomeranz: Those taxes are paid by the individual who buys the real estate investment trust?
Michael Torres: That is absolutely correct.
Steve Pomeranz: That's different from real estate operating companies in what way?
