Yngve Slyngstad and Peter Ballon aren't well-known names in the U.S. investment community, but their decisions are having a multi-billion dollar effect on a key asset class. These men head up organizations that manage Sovereign Wealth Funds in Norway and Canada, respectively, and each one is now scouring the United States for premium real estate opportunities.
Canadian investors already have a head start. They've deployed $9 billion in U.S. funds during the past few years, much of it at the behest of the Canada Pension Plan Investment Board, with plans to keep investing aggressively in U.S. real estate in the next few years. Like Norway, Canadian government investors also prefer high-end office buildings.
Follow the money trail, and you can see that it's a great time to be an investor in this kind of real estate. This is actually what Carla Pasternak, chief strategist of High-Yield Investing, has been telling her eaders for months. She's even called it the "most dramatic turnaround in U.S. history."
[See also "The Easiest Way to Become a Landlord in 2013"]
With this clear trend in mind, here are three U.S. real estate investment funds that should greatly benefit from this foreign flow of funds into the country.
1. The Blackstone Group (NYSE: BX)
My colleague Michael Vodicka recently profiled this firm for its aggressive move into distressed residential real estate. But did you know that Blackstone also owns more than $50 billion in traditional real estate, including high-end office complexes?
At a recent conference, Blackstone's Jonathan Gray, global head of real estate and a board of directors member, recently said the company intends to take advantage of the ripe market conditions, aiming to fetch high prices for some trophy properties. "The other trend that will be helpful for us to exit some of the larger things we own, particularly the higher-quality assets in the gateway cities, is the rise of the sovereign wealth fund."
Having major buyers lined up is in keeping with Blackstone's long-term "strategy of 'buy it, fix it, sell it,' in which the firm looks to acquire good assets that need improvement at low replacement costs," according to Morningstar. This approach has led to 27% annualized long-term returns in Blackstone's real estate portfolio, according to Morningstar.
Analysts at Citigroup say the stage is set for Blackstone to boost its dividend. They look for the payout to rise from 54 cents a share in 2012 to 81 cents in 2013, to 95 cents in 2014. That 2014 payout would represent a dividend yield of 5.6%.
2. Cohen & Steers (NYSE: CNS)
This firm is sitting in the proverbial "Catbird Seat," as it provides real estate advisory services, and operates a range of mutual funds and exchange-traded funds (ETFs) focused on real estate. Though individual investors have long relied upon this firm's mutual funds, the past three years have seen a huge surge of institutional clients as well.
Still, the retail (individual) investor side of the business remains quite healthy as well. Merrill Lynch notes that Cohen & Steers' various mutual funds have seen a net inflow of assets for 14 straight months, bucking the broader trend of fund outflows for many other fund firms. The increased book of business is helping to fuel steady profit growth: earnings per share (EPS) is on track to rise from $1.23 in 2011 to more than $2 by 2014, according to consensus forecasts. This should help the dividend to continue growing. The payout has risen from 40 cents a share in 2010 to 72 cents a share in 2012, and could approach $1 by mid-decade.
Three out of four winners, but that Motricity (Nasdaq: MOTR) pick surely hurts. Of the group, I still see the best upside for iStar Financial. Management has taken a range of steps in recent years to shore up a once-scary balance sheet.
Though shares have moved up to a recent $8.75, they're still well below the $50 trading level seen in 2006, when the real estate market was last on solid ground.
I'm not anticipating a move back to those levels, but shares could rise up into the low teens as iStar takes advantage of the current fertile environment by selling off loans that are quickly moving back to par (they had been deeply underwater after the 2008 economic crisis). Management has written down the value of many of its loans and other assets, but should be in a position to write them back up in coming years. That should help boost book value -- and the share price.
Risks to Consider: This is still an economical-sensitive industry, so a slumping U.S. economy in 2013 would take much of the newfound luster off of real estate.
Action to Take --> As a number of my colleagues have noted in recent quarters, real estate is proving to be an attractive asset class as we head into 2013. While many investors are focused on residential real estate, global Sovereign wealth funds are more attracted to high-end commercial real estate, especially office towers.
If none of these stocks hold appeal, then there are also more than a dozen ETFs focused on real estate, though I'm partial to the Vanguard REIT Index ETF (NYSE: VNQ) because of its ultra-low 0.1% expense ratio and solid 8.4% annualized return during the past five years.