BlackRock Likes Property Even After Yellen Calls Prices 'High'

(Bloomberg) -- Federal Reserve officials say U.S. commercial real estate is expensive. That isn’t stopping the world’s biggest money manager from saying it’s time to buy.

BlackRock Inc. says property can deliver average yields of 3.5 percent, compared with 3.4 percent for U.S. investment-grade bonds and the S&P 500 Index’s dividend yield of 2 percent. Demand is spreading as far as Asia, where Mirae Asset Securities Co. is buying U.S. real estate, including some of the Seattle buildings that house Amazon.com Inc.

“The U.S. commercial real estate recovery still has room to run amid reflation and resilient rental yields,” Richard Turnill, BlackRock’s London-based global chief investment strategist, wrote in a report on the company’s website Monday. New York-based BlackRock oversees $5.1 trillion world wide.

Property prices have risen enough that Fed Chair Janet Yellen is taking note. Commercial real estate is “high,” she said in January.

Boston Fed President Eric Rosengren said around the same time he’s also monitoring such assets. “If you look at prices of commercial real estate, particularly multifamily properties, they have been going up very rapidly in many parts of the country.”

Appetite for real estate shows the hunt for yield is alive and well as investors strive to improve on payments available from government debt. Even though the Fed is raising interest rates, 10-year Treasury yields have been stuck at about 2.5 percent. The highest they’ve been in the past year is 2.64 percent.

The Moody’s/RCA Commercial Property Prices Indexes, which cover apartment, retail, office and industrial sectors, rose about 8 percent in the year ended Jan. 31. The S&P 500 gained 17 percent and Treasuries were little changed.

Fed rate hikes are a sign of improving economic growth that will support property prices, said Park Sungjin, the head of principal investment in Seoul at Mirae Asset Securities, which oversees $8 billion. Last year, his company also bought the buildings that house State Farm Life Insurance Co. in Texas, Park said.

“The Fed can hike three times this year,” he said. “Maybe they can hike more. That means the economy’s good.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Garfield Reynolds, Emma O'Brien