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Safe Haven

Investors find stability in real estate amid a volatile stock market.

It’s hard to pinpoint exactly what is scaring investors away from the stock market these days. It could be Wall Street’s bear market, which has been getting clobbered for nearly three years. Or it might be the effect of highly publicized accounting and corporate scandals that have shaken investors’ faith. It’s most likely a combination of both, but, whatever the reason, one thing is certain: Consumers are wary, and in their flight for safer havens for their hard-earned money, real estate has become an attractive place to lay their nest eggs.

“Over the past three years, real estate investments and publicly traded Real Estate Investment Trusts (companies that invest in real estate holdings) surpassed returns in the stock market,” says Mike Hamasu, director of consulting and research for Colliers Monroe Friedlander. “The perception is that a fixed, tangible asset is safer during volatile times.” Furthermore, interest rates are at 30-year lows, and last year’s terrorist attacks have gotten consumers investing where they feel most secure – home sweet home.

Coldwell Banker Pacific Properties Managing Director Herbert N. Conley says he has certainly noticed a spike in residential real estate investment activity, and that in addition to the stock market slide, rising home prices have also helped fuel that trend. According to research from Prudential Locations, the average price for a single-family home on Oahu has risen 49 percent, from $243,966 in June 1998 to $364,487 this June. The number of home-sale contracts signed increased as well, from 117 in June 1998 to 230 in the same month this year.

“Prices have begun to rise, after dropping since 1991. When prices go up, investors will begin investing [because] there is appreciation,” says Conley. “Also, rental rates have risen, so the cash flow from investment properties has added value. Finally, as the stock market has dropped, money that would have gone into stocks has now moved to real estate.”

The types of real estate investments that have seen the biggest increases in activity are as follows:

  • Rental Properties: Relatively little new office, industrial or apartment space is under construction, thereby pushing rents up across the board.
  • Home ownership: With mortgage rates dancing near record lows, and a squeeze on residential properties in the state, consumers are diving headfirst into the homebuyers’ market.
  • Real Estate Investment Trusts: In the first seven months of this year, investors put approximately $2.7 billion into REITs, compared with just $34 million for all of last year, according to Merrill Lynch. Not a bad bet, considering that at the end of last year, the average dividend yield for REITs was 7.38 percent – more than five times greater than the average for stocks in the S&P 500 Index.

Whether dealing with real estate or stocks, financial advisors have the same advice: Diversify and buy value. “People ought to be careful that they don’t overpay or put all of their eggs in one basket when there’s a feeding frenzy going on like there is now in real estate. Yes, real estate has been going up, and I’ve even heard people using the word ‘bubble.’ But the stock market was in a bubble three years ago, and now that same bubble is driving investors out of the market and into real estate,” says Paul Loo, senior vice president of Morgan Stanley Dean Witter – Pacific Region. “Now the question is, do investors really want to get out of a market in securities that has declined for two-and-a-half-years, which may well be at bargain prices, only to move into another bubble and make the same mistake all over again?”

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Hawaii Business,October