Will the Recent Pullback in REITs Create a Buying Opportunity?
Over the course of the last thirty years, REITs have outperformed the S&P 500 Index.
Source: Chart of the Day According to recent commentary from Chart of the Day, "...the current correction in REITs is comparable to that of the more dramatic corrections of the past 35 years." Does the recent correction in REITs provide an investment opportunity?
There are a number of risks with real estate investments though. Some of the retail mall REITs and industrial REITs could remain under pressure if consumer spending remains constrained and the economy remains in a slow growth mode. The National Association of Real Estate Investment Trusts (NAREIT) site maintains comprehensive quarterly data on REITS. Below is some chart data from the April 2008 report [PDF].
The YOY dividend growth rate has remained in the mid single digits.
The REIT dividend payout as a percentage of funds from operations does remain below the longer term average payout of 73.75%.
And finally, if there is one event that could derail or delay a potential recovery, it is tighter bank lending standards. As the below chart notes, banks have indeed tightened their lending.
In the end opportunities may be uncovered in some REIT investments that have lower levels of leverage, stronger FFOs and operate in stronger real estate segments.
Source:
NAREIT Chart Book [PDF]
National Association of Real Estate Investment Trust
April 2008
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This article has 4 comments:
- johnthebear
- 257 Comments
Aug 13 07:14 AMNO, IT DOES NOT PRESENT A BUYING OPPORTUNITY!
IYR will continue moving down. REITs with cash can buy at good prices for commercial real estate once the fluffy lofty values evaporate as capitalization rates rise along with inflation and higher interest rates.
Have you not heard that 12 trillion dollars have been lost from the world wide equity markets? Don't you believe that the worst is yet to come in bank losses? If you can get your mind around all that, you have to realize that banks will not have money to lend for large commercial development projects for a long time. Buyers will not be able to get financing and then at higher interest rates and based on more credible appraisals than has been the rule of the last couple of years. This means prices of the best real estate fall and REITs will have to mark to market the inflated value of much of their portfolio going into 2009. As vacancy rises and foreclosures increase, rents will fall. NYC has lost over 75,000 of it's highest paid workers and now even houses in the Hamptons are even being discounted! Have you heard that Wall Street firms will likely be seeking tax refunds from the city for over estimated taxes for 2008? NYC and the state of NY appear to be headed for a financial crisis, again.
None of the foregoing facts are taken into consideration in an argument that is based on the premise that prices will continue to go for the next 30 years the same as in the past 30 years...
Yes, there will be a time to buy IYR, but not for another year or two from NOW! Until then, SRS is a better way to play the REIT market, IMO.
- johnthebear
- 257 Comments
Aug 13 08:55 AMU.K. Commercial Real Estate Returns Drop By Record
By Peter Woodifield
Dec. 14 (Bloomberg) -- U.K. commercial real estate returns fell by a record amount last month as higher interest rates and a drop in bank lending pushed prices down, according to Investment Property Databank Ltd., a London-based research firm.
The total return on investments, after taking rental income and growth into account, slumped 3.6 percent in November. That's twice the size of the last record decline, a 1.8 percent fall in returns in May 1990, IPD said in an e-mailed statement today. The value of shops, offices and warehouses plunged 4 percent in November after a 1.9 percent decline in October.
Four straight monthly falls in property returns have cost investors 1.8 percent of their money this year. Commercial property is set to break its streak of being the only U.K. asset to have made money for investors every year since 1992 as appraisers mark down prices in the wake of the credit squeeze.
``This is a price correction rather than a significant prolonged downturn,'' Andrew Jackson, property investment director at Standard Life Plc's fund unit in Edinburgh said in an interview. The unit oversees 15 billion pounds of real estate assets.
So far this year commercial property values have fallen by 7.8 percent, compared with a 27 percent fall between 1989 and 1993, IPD said in the statement. Unlike the early 1990's, demand for space remains strong and rents are growing in all sectors, the research firm said.
Improvement Ahead
``We should be through this quicker than'' previous market declines, said Jackson. ``It's better than having a 1 percent fall every month for the next 12 months to 14 months. We should see a little bit more light towards the end of the first quarter of next year.''
Returns fell 0.3 percent over the past 12 months, the first time annualized returns have been negative since February 1993, said IPD.
The price of shops and malls plunged 4.3 percent last month, compared with a 4 percent drop in the value of offices and 3.2 percent in the value of industrial properties. Those declines were offset by a rise of 0.4 percent in rental income return.
The capital value of commercial property in Britain has fallen back to the level of May last year following November's drop, said IPD.
The monthly IPD index is based on figures supplied by real estate investors owning 4,209 properties worth 53.8 billion pounds ($108.8 billion). IPD started its monthly index in December 1986.
To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg....
***********
As you will note, things did not go as expected when the writer stated:
``We should be through this quicker than'' previous market declines, said Jackson. ``It's better than having a 1 percent fall every month for the next 12 months to 14 months. We should see a little bit more light towards the end of the first quarter of next year.''
Clearly, both residential and commercial markets in the UK are worse now than in December and they show no signs of recovery.
The market outlook for commercial property is certainly not much better in the US than in the UK.
- Jonathan Christopher
- 18 Comments
Aug 13 04:00 PM- user 4ver
- 2 Comments
Aug 13 05:14 PMMore by David I. Templeton