Is It the Wrong Time for REITs?


YOU CAN PROBABLY SEE the headlines about the real estate bust in your sleep. Foreclosures are rising. House prices are falling. Commercial real estate borrowers are defaulting. But behind the headlines is a little noticed fact: Publicly traded real estate investment trusts have soared from their bear market lows. The Wilshire U.S. Real Estate Securities index has nearly doubled since March. One real estate investment trust, LaSalle Hotel Properties (LHO), rose more than 400 percent.

But that doesn’t mean this is the beginning of the next real estate boom. The REIT rally came about because traders breathed a huge sigh of relief when there weren’t a lot of bankruptcies in 2009. Most REITs are still trading below their prices of three years ago. “There’s no compelling reason to jump in now,” says John Coumarianos, who follows the sector for Morningstar. The dividend yields on REITs have fallen dramatically too (REITs are required to pay out at least 90 percent of their taxable income as dividends). Last March, for example, the office building-focused Vornado Realty Trust had a 9.6 percent yield. Now it’s less than 4 percent.

The prospects for a rebound in much of real estate don’t look good either, analysts say. Hotel REITs are suspect because the economy has left many hotels without pricing power. In even worse shape, however, could be REITs that specialize in shopping centers. Many developers erected malls near new housing developments. Unfortunately, many of those new housing developments are filled with empty homes or residents behind on their mortgages.

One bright spot, experts say, could be apartment REITs. The percentage of Americans who rent rather than own is likely to remain higher than it was a few years ago, says David M. Lee, portfolio manager of the T. Rowe Price Real Estate fund. One lesson Americans learned over the past few years, Lee says, is that “we can’t put quite as many people into single-family homes as we wanted to.” And after the building boom earlier in the decade, it’s become tough to get financing for new apartment building construction in many markets. Analysts say that could keep a lid on the number of new buildings built for a couple of years, giving landlords some pricing power over tenants.

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