Core investing outperforms all classes on risk-adjusted basis.

A team of researchers from Lend Lease Real Estate Investments has found that, during the past three years, "core" real estate investments have significantly outperformed all major asset classes on a risk-adjusted basis. The superior relative performance is expected to continue for the foreseeable future, as supply and demand for commercial real estate space remains in equilibrium.

The findings were detailed in "Today's Core Values," a commentary authored by Joseph A. Hill, M. Leanne Lachman and Daniel T. Van Dyke, issued today by Lend Lease.

The commentary defines "core" real estate investing as that which minimizes risk under both an "asset definition" and a "portfolio definition." In the former case, the primary defining characteristics include assets that: are substantially rented existing properties, have an orderly lease expiration schedule, are of high quality, are from among the four basic property types (office, industrial, retail and multifamily housing), are functional and well maintained without excessive capital reinvestment required, and carry no more than 25 percent debt.

A "portfolio definition" indicates a mix of at least three of the four main property types, geographic diversification, tenant/industry diversification and lease rollovers staggered across an entire investment portfolio in a fairly balanced pattern. Such a definition can be satisfied in a substantial portfolio wholly owned by a large institution, or in a commingled portfolio - that includes multiple investors.

While the Dow Jones Utility Average (18.7%) and the S&P 500 (14.9%) outgained NCREIF's (National Council of Real Estate Investment Fiduciaries) Property Index.

(13.6 %) average annual return during the Q3 1997-to-Q3 2000 period, NCREIF far outperformed the other two indexes and all others, once all returns were adjusted for risk.

Pointing out that national vacancy rates for the major property types are in the single digits, with rents continuing to rise -- and that new construction is proceeding at a reasonable pace with little overbuilding threat -- the authors said, "In times of equilibrium, core investing is usually the optimal approach. In contrast, opportunistic investors thrive in disequilibrium (such as in the early 1990s), when money is in short supply and the future is uncertain. A market in equilibrium is more transparent and far less risky."

Also, "Core real estate, by definition, carries low leverage. That reduces risk -- and assures that free cash is available for income distributions. Hence the cash return from core assets is attractive and stabilizes returns."

The report concludes, "In times of equilibrium, core real estate produces solid returns (well above bonds) with modest risk (well below stocks). Consequently, this is when real estate provides positive portfolio diversification and is actually a return enhancer on a risk-adjusted basis."

Lend Lease Real Estate Investments is one of the largest real estate investment managers in the world and a leading U.S. real estate advisor to pension funds. The company has $41 billion in real estate and commercial mortgages under management for institutional and private clients in the US.