Homeowners who sold in the District last year may have had a better rate of return on their investments than some professional property investors nationally who work for banks and insurance companies, city and investment industry data indicates.
According to statistics assembled by George B. Altoft, senior residential assessor for the District, the average sales price of single-family houses in the city increased by 30 percent during the 12 months ending in April. In a recent survey of the industry, the best rate of rate of return experienced by a professional property investor last year was 19 1/i percent, the rate reported by Prudential Insurance Company of America's PRISA fund.
The track records of 11 insurance and bank real estate investment funds that exceeded the 6.55 percent rate of return for the Standard & Poor list of 500 common stocks were calculated by Pensions & Investments magazine. The return on investment ranged from Prudential's 19 1/2 percent to Travelers Insurance Co.'s Separate Account "R" return of 6.78.
With $1.09 billion in assets, Prudential's PRISA is by far the largest and the best known of all the commingled real estate pools, investing for pension funds as well as for corporate clients who buy shares in the pool. PRISA is 60 percent invested in office and industrial type properties. Only 7 percent of its property is classified as residential, and 0.1 percent as land.
Other pools have different property mixes. Equitable Life Assurance Co.'s Separate Account No.8 is 43 percent invested in retail property. Equitable, with $378 million in assets, had the second best record: a 13.32 percent rate of return. Continental Illinois' Real Estate Fund No. 1 is 42 percent invested in residential property.
Banks are relative newcomers in the real estate field. Yet the First National Bank of Chicago now ranks as the third-largest pool, with $165 million in assets. Its 1978 rate of return for its Real Estate Fund was 8.9 percent. Pensions & Investments studied the geographical distribution of properties owned by commingled real estate funds. More than a third were situated in the West, closely followed by the Midwest. Only about 10 percent were located in the East.
PRISA's capitalization ratio, or cash-on-cash return, is around 8 percent. Other funds say they will only look at properties with a cash return of as much as 9 1/2 percent, although they don't always succeed in making that kind of money. One reason is competition from foreign investors who are willing to accept lower yields in exchange for stability, growth and freedom from expropriation.
This, along with competition from other U.S. insurance company real estate pools and more recently, from banks, has led to a scarcity of good properties at reasonable prices. PRISA has not accepted any new money since 1977. Pension funds, ever mindful of the 1974 debacle and fearful of speculating in real estate with their clients' retirement nest eggs, have been all too willing to cut their risks by investing in pools of properties or mortgages assembled by the experts employed by insurance company or bank funds.
However, the growing scarcity of properties and the closing of pooled funds like PRISA is leading some pension administrators to create their own private portfolios, according to Peter C. Aldrich, president of The Boston Co. Real Estate Counsel Inc. Aldrich, who has long advised pension funds to get into real estate, nevertheless urges caution. If inflation continues at the current rate, today's prices for commercial real estate constitute a bargain, he said in an article for Pension & Investments. However, should inflation drop to around 3 percent, depreciation of a property would eventually wipe out any gain in its value.
Aldrich views this as an exciting time in the real estate investment business. "This rush is finally on," he said, "and finally pension plans are seriously moving into the market. The entry of this large pool of resources will change the structure of our real estate capital markets." Yet even Aldrich won't go farther out on limb except to predict that in 10 years, "things will be different."