Tuesday, January 13, 2009

Buyer Perception

What is happening with the perception of today's net lease investor? The private investor, those individuals that are seeking to invest their own money, is essentially seeking a deal. While most net lease investments, by nature, do not have drastic potential for increased future yields, the intital capitalization rate has become more important than in years past.

There have been many transactions over the last several years that garnered extremely low returns for the investor. Sometimes those cap rates were below five percent, but it seemed to make sense for the investor because they were purchasing a depreciate asset that had a sound tenant paying their rent.

However, those very same tenants, with the very same lease terms, are now proving that the buyer is looking to receive a better initial yield then they previously sought.

Lets take a stereotypical net lease investment as an example; a Walgreen. Your local Walgreen is always on the best corner in town, they are an extremely viable company with an investment grade credit rating and their lease is as passive as they come. Additionally, the length of the lease is for an initial term of 25 years with no escape clauses.

There was a day when this bond-like investment would trade at a yield of 5.75%. Which means that the investor would be locked in to that exact same yield for the duration of the lease. But investors felt OK with that since they were also gaining a strong sense of security with the above average real estate they were purchasing as well as the credit rating of the tenant. In today's market environment, however, that very same investment would trade above a 7.00% cap rate. Quite a large difference from years past, but the perception has changed for the investor and they are requiring added yield for their investments, even though the same intrinsic indicators of the investment have not changed.

It is something to consider for both buyers and sellers in today's market that assets priced fairly and appropriately will always trade in any market.

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