Play Falling Commercial Real Estate with SRS

Mar.16.09 | About: ProShares UltraShort (SRS)

SRS is an inverse ETF that will perform well as REITs, and more specifically, the commercial real estate space, falls. Know what you are investing in: SRS does not have primary exposure to the residential real estate market. It holds primarily REITs. REITs are not focused on mortgages. REITs are oriented toward commercial property.

Product Description:

UltraShort Real Estate ProShares is an exchange-traded fund incorporated in the USA. The Fund seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index.

Fundamental Analysis

Macroeconomic fundamentals in the health of the real estate sector will govern the direction of this asset. Over the past two years, home prices, home sales, volume, starts, etc. have all be focused on the consumer side of real estate. Commercial real estate has not received the same attention. In fact, commercial real estate has held up better in relative terms than the homes. This concerns me.

There has been a fundamental shift in consumer behaviour, most especially seen in Q4/2008. In the U.S., savings rates have increased. If savings is increasing, consumers are spending less. If consumers spend less, the demand for consumer goods will decline. We have already seen these figures.

Even that simplistic analysis above is already well known and is nothing new. Thus the next item to factor in is unemployment. 8.1%. Friday’s unemployment increased over 600,000 in the U.S. Fewer jobs means fewer office cubical needed. If you read commercial real estate news the impact to REITs is significant:

  • Tishman Speyer’s 556,000 sq. ft. 555 Mission Street, opened in late-2008. It remains 70% empty.
  • The hit on the legal profession is jaw-droping. In investment terms, this is hitting landlords. The dissolution of Heller Ehrman has emptied 350,000 sq. ft; 388,000 sq. ft. on 101 Second Street has been vacated due to the dissolution of Thelen LLP., another law firm

Technical Analysis

The use of technical charting for 2x beta ETFs is discouraged. This product is also only 2 years old, so there is no historical context for which to base a meaningful analysis. See SRS charts here:

Chart technician die-hards are still welcome to review the chart. Note that in the short term, the SRS rally from $48 to $100 may be subject to a correction. Volume has not increased significantly. The ETF cut past the moving average in the $80s (weekly) and ~$58 (50 day moving average), ~$90 (200 day moving average).


Include a small percentage of the portfolio in SRS. This is not a guaranteed winner, for the gains and losses are spectacular: it can go either way. At this time, the real estate market collapse has not seen even a hit of abating. Unemployment has grown steadily from Q4/08 to Q1/2009. Economists and analysts all predict this to increase. My comment on this is that straight-line projections are not necessarily an accurate one. Monitor unemployment rates week-to-week if not month-to month, but do not forecast total unemployment in 2009 and then apply that valuation analysis on REITs.

My target price is $80 – $120. A break above $120 suggests a price target revision of $145-$190. Best not to be greedy if that latter price is reached. Accumulate on weakness. Take profits and balance it against any losses in long positions.

See my KaChing portfolio here .

Disclosure: Long