Real Estate: Is the time to sell upon us?

The old investment adage goes ‘buy low and sell high’ regardless of whether the investment is real estate, stocks or rare birds!

The problem, however, is that unless you happen to be a seer it is virtually impossible to consistently buy the bottom and/or sell the top of a market move.

In fact, for an investor one of the most difficult things to do is to overcome fear and buy when everyone else is selling even if that is 100% the correct move.

Equally as difficult can be overcoming greed and objectively deciding when to sell an investment.

Real estate investments!

Given the fact that we are now years into the post-financial crisis real estate ‘recovery’, will there be a tipoff or a ringing alarm that will signal to investors that the time is nigh to sell?

In an article written by Keith Jurow titled ‘Knowing When to Sell Real Estate Investments‘, the rationale for at the very least considering a sale of an investment property is discussed (Keith Jurow, Ph.D., has been researching and writing about the housing market debacle around the U.S. with an eye for stories that are frequently overlooked or ignored by the media.).

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.

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.

During the beginning of the credit crisis in 2008, wealthy investors were still caught up (like nearly everyone else) in the frothy optimism of the bull market in equities and had not even considered that the real estate bubble could pop. They had at least a year to lighten up their real estate portfolios, and smart investors did just that. Unfortunately, most of them could not shake their euphoria, and their portfolios were crushed in 2008 and 2009.

It is very rare today to see any serious discussion of the investment risks in real estate.

Treasure your cash when investors are euphoric

Back in 2012, Morgan Stanley’s head of wealth management had the temerity to assert that holding cash was unsafe. Really? Of course, he meant that the opportunity costs during a bull market were very high. Unfortunately, that view resonates with wealthy and not-so-wealthy investors.

Widespread investment euphoria causes even savvy investors to lose the necessary vigilance. Market and credit risks are brushed aside or, even worse, not examined at all. There is a very dangerous assumption held by real estate investors that the worst is over. Risk is no longer a major consideration. The only important question: What is the appropriate asset allocation?

Investors have apparently been duped by Wall Street’s claim that they need to be fully invested now. This is confirmed by the April figures for NYSE margin debt, which showed a record level of $507 billion.

Morgan Stanley’s June 2015 asset allocation recommendation for investors with net worth less than $30 million suggested a 1% cash position for those with a moderate risk comfort level. Of course, they do not explain why this might be a high-risk proposition. This sounds like more of “the coast is clear” that we have heard for several years now. Remember, this is the “sell side” talking.

The puzzling thing is that the wealthy members of Tiger 21 completely disregard this recommendation. Their latest asset allocation survey showed an average cash level of 10%. Although this cash allocation was down from 14% at the end of 2011, that could indicate Wall Street has less influence over high net worth investors than we think.

Further evidence comes from U.S. Trust’s 2015 Insights on Wealth and Worth. It surveyed roughly 640 wealthy investors with investable assets greater than $3 million and found that 62% held more than 10% of their total portfolio in cash. That would appear to confirm the Tiger 21 figure. But it is not so simple.

The U.S. Trust survey also found that more than half of those investors surveyed were focused more on growing their portfolio than on asset preservation. More than a third of them were willing to take on higher risk to obtaining greater returns. That percentage was down only slightly from a couple of years ago.

The percentage of those surveyed who were optimistic about the stock market climbed from 40% in 2014 to 45% in this year’s survey. You may think that this percentage of optimists is low. However, a mere 6% of these wealthy investors were pessimistic. That is bullish euphoria. Nothing was specifically asked about how concerned those surveyed were about current risks to their portfolio.

Knight Frank is one of the largest real estate consulting firms in the world with headquarters in London. In its 2015 Wealth Report, the company found that 37% of UHNW clients surveyed had increased their exposure to real estate in 2014. The same percentage expected that to continue in 2015. The report also revealed that their younger wealthy clients were even more interested in property investing than their parents.

Follow the smart sellers

Read the rest of this excellent article at Advisor Perspectives here.


Article author Michael Haltman is the President of Hallmark Abstract Service in New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.

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