Property Strategist Discusses Urdang, REIT Hedge Funds

Jan 26 2006 | 7:41pm ET

Plymouth Meeting, Pa.-based Urdang Capital Management is readying to launch its first hedge fund, a long/short vehicle that invests in real estate investment trusts, according to a source close to the firm. Managers at the firm did not return calls seeking details, but one industry expert did give us his thoughts on whether he thinks it is a good time to be launching a REIT hedge fund.

Michael Hudgins, a research strategist at Boston-based Property & Portfolio Research, said that Bank of New York's acquisition of Urdang should prove beneficial for the real estate investment firm, but that he is surprised to hear that it is launching a REIT hedge fund at this time.

“I find it interesting that Urdang would do that. It seems to me that a hedge fund would be looking at something else,” said Hudgins, “but real estate is still one of the best plays out there, and maybe there is a last hurrah for specific REIT sectors in 2006, like retail.”

“Real estate has priced itself into a true “y + g = r” environment (yield + growth = total return). The private side is sitting in a low yield basin from which only cash flow growth will save investors from capital losses as yields begin to rise in 2006 for some sectors and 2007 for others,” he said.

Hudgins believes that picking the right sectors and metropolitan areas to invest in is critical in this environment. “Dividend yield spreads are close to zero for the NAREIT Index, and they were negative for warehouse and retail as of December. The last time we had negative spreads we ended up with a 33% correction in the price index,” said Hudgins. “It’s a simplified view, but one to consider.”

Hudgins does not discount the idea of starting a real estate hedge fund at this time. He points out that there is nothing else out there that is particularly attractive.

“Stocks are showing some intermittent perkiness but are not confidence-inspiring, and bonds prices can only really go down as yields start to rise from their current position in the ‘low-yield basin.’ Like the private side, there will be sectors and stocks that provide enough growth to fend off capital losses over 2006 and/or the next three years, but the bottom line is that it may be a great time to start shorting REIT stocks,” said Hudgins. “Maybe that’s part of Urdang’s strategy.”

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