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By Andrew Gogerty | 06-09-2011 11:22 AM

Go Global for Real Estate Values

Certain international real estate markets are offering very strong fundamentals and long-term growth prospects at better pricing than the U.S. and U.K. real estate markets, says Third Avenue's Jason Wolf.

Andrew Gogerty: This is Andrew Gogerty for Morningstar, and we're here talking the real estate sector at the 2011 Morningstar Investment Conference.

Real estate funds continue to be in demand from investors, having enjoyed positive flows again so far this year, and joining me today with a global perspective on the real estate sector is Jason Wolf, the co-manager of the Third Avenue Real Estate Fund.

Jason, thank you for joining me today.

Jason Wolf: Nice to be here Andy.

Gogerty: Going back to the demand in the U.S. for these funds, obviously flows have been strong. You guys have a global mandate, and you only have a third inside the U.S., and you have almost two-thirds of the fund positioned outside of the U.S. I wonder if you can give me your perspective broadly on the opportunity set of U.S. versus non-U.S. right now? What's driving that U.S., non U.S. I know its stock specific, but maybe even from a macro level, what's driving that allocation right now, because it seems like on an asset basis, you're finding more opportunities outside the U.S. to deploy your assets.

Wolf: The Third Avenue Real Estate Value Fund about seven years ago really started to gradually move its assets overseas, and it started with Hong Kong. But when you look at the opportunity set today, particularly since the great financial crisis, real estate stocks in the U.S. and the U.K., particularly real estate investment trusts, have risen quite considerably in comparison to the fundamentals that you would think would be supporting them.

The complete opposite has happened in the international markets or Asia ex-Japan, where you've seen fundamentals, strong office, retail, residential growth and cash flow growth, and you haven't seen the same type of pricing increases that you would have thought would've occurred.

Gogerty: So, the exact opposite of the U.S. the fundamentals go up but the prices are staying down.

Wolf: Exactly, and so this has led us to these areas, where we're finding very strong fundamentals, better pricing and long-term growth prospects, because when we think about Hong Kong, China, we think about a 10-year period of very, very strong dynamics for growth in real estate values.

Gogerty: For investors that may not know Third Avenue Real Estate, but know Third Avenue and Marty Whitman: safe and cheap, hardcore strict-value strategy. How are you applying that to one specific sector here? What are some of the tenets that you're looking at, because obviously you're not sticking to mainstream REITs like a lot of your peers, but you're looking at related companies, traditional corporations. How are you taking that basic value philosophy and executing it inside the real estate sector?

Wolf: Sure. We think that there are some real advantages to being a real estate value investor in the securities markets. One is that our opportunity set is pretty large. We'll buy REITs, we'll buy real estate operating companies, and we'll buy real estate related entities. We will also invest throughout the capital structure, so we'll also buy equities and debt, and in some cases the distressed debt of companies that may be entering bankruptcy. And this is also done without a constraint that most real estate funds have of being benchmark focused, market caps or geographies.

So, we're just really trying to find where the opportunities are and go to those places. The other part of it is that we're very price conscious, and being price conscious will sometimes lead us to a lack of opportunities, and so cash will build up in a portfolio.

Then the third part of it is, we're more capital appreciation focused than most real estate funds that are more dividend focused, so it's more of a total return outlook, where we're looking for companies that can compound value over a long period of time.

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