Are REITs a Good Place to Hide from Inflation?

According to a study published in the most recent Financial Analysts Journal (Volume 65 Number 2), in US housing market, there were seven red-hot and then stone-cold regional housing markets, including California, Florida, Nevada, New York and DC. In these markets, prices soared up to a market peak at Q4 2006 and then began to collapse. At the same time, housing markets remained stable throughout much of the US. Despite the severe correction in a handful of high-profile markets, housing prices have continued to rise in 23 states. The current and unprecedented national wide decline in housing prices has had little or no effect on homeowners in 34 of 50 states.

Young couples and new immigrations want to buy homes. As far as the baby boomers are concerned, they are never going into a nursing home. According to David Cravit, author of The New Old, senior citizens fear moving into a nursing home and losing their independence more than death. They don’t want to downsize their homes or stop making extensive home improvements.

iShares Dow Jones US Real Estate (IYR) is the largest real estate ETF with assets of $1.4 billion. The top 3 holdings are Simon Property Group (SPG), Public Storage (PSA) and Annaly Capital Management Inc (NLY). Early 1980s double digits inflation led to late 80’s housing bubble. Could history repeat itself this time? Your crystal ball is as good as mine.

U.S. Treasury Yield Curve chart below from Bloomberg shows the sharp rise in long-dated bond yields, and a widening gap between short and long term yields. Does it suggest an economic recovery is more certain, meaning inflation is on the horizon? Or does the steepening yield curve mean investors are worrying about the deterioration in the U.S. fiscal outlook, or the potential collapse in the U.S. dollar as the Fed floods the world with trillions of newly minted currency as part of its “quantitative&rd... program? Either way, real asset class such as IYR might be a good place to be.

On June 3, Fed Chairman Bernanke urged Congress to cut record-high budget deficits or they could erode investor confidence. Bernanke’s comments came as concerns grow at home and overseas about the United States’ mounting red ink.

There are 2 interesting debt clock websites showing real time U.S. and Canadian’s national debts. As of today, U.S national debt is $11.35 trillion, or $37,000 per citizen, according to U.S. Debt Clock. Unfunded liability is over $57 trillion. Canadia... federal debt is $468 billion, or $14,000 per citizen, according to Canadian Debt Clock. In other words, each U.S. citizen’s share of debt is more than twice than Canadian’s.

So for me, in additional to iShares Barclays TIPS Bond (TIP), I would rather own Canadian REITs iShares CDN REIT Sector Index that is traded in Toronto Stock Exchange (TSX) under symbol XRE. It holds 11 Canadian real estate companies with total asset of C$468 million ( or around $430 million US).

Disclose: I have long position on XRE and TIP.

Comments

[worriedwart]

Since long term bond yields could mean anything......

Forget arguing Bush/Obama etc please lets just talk economics

The debt is growing and taxes/fees etc are going to go higher
Companies are going overseas as biz taxes go higher and the states and localities are screaming uncle

We see funds that are "conservative" losing money as the perforances are so/too low that even min fees take .05% so that 100k is down approx 480 for the year

The gov is getting free money as people dont have a safe haven and are willing to lose money to get any type of protection they can

I mean Hugo Chavez did in fact say the other day that he and Fidel are to the right of Obama... I am not getting political I merely say it so we can see that bigger gov is here and appears to be "in"

buying land seems good idea as long as you dont need the money or expect any development of that land or dare I add eminant domain land grabs but overzealous local dictators doing things for the "good of the people"

Is it really over?

2009 Jun 05 09:10 AM

[Old Trader]

I'm going to guess that SA changed the title to your article, as is their wont. REITs come in a variety of flavors, ranging from operating REITs, (SPG, PSA) to mortgage REITs (NLY). Within the operating sector, there's also a variety, from those that focus on commercial RE, to those whose focus is residential.

Higher interest rates (which WILL be coming) are not a favorable development for REITs, since they're dependent on the debt markets for funding (their other option being issuance of additional shares, resulting in dilution of existing shareholders). Inflation hits the commercial REITs especially hard, since lease terms are typically much longer than for the residential sector, meaning they can only raise their rents upon lease expiration, as a rule.

2009 Jun 05 10:38 AM

[Eye Forget]

Your article asks a lot of questions, takes few positions and explains nothing. XRE is down about 50%. I assume this is your dollar hedge?

2009 Jun 05 12:12 PM

[Duude]

The last thing we need are class action ambulance chasers clogging up the Internet with their 3rd class gold mining posts. If the Internet is your choice for marketing stick to your own website or craig's list alongside the other perps.

2009 Jun 05 02:06 PM

[Baboon]

On Jun 05 10:38 AM Old Trader wrote:
> (their other option being issuance of additional shares,
> resulting in dilution of existing shareholders).

Aren't they need the new funding only if they want to buy new property? If this is the case why would that delute their value?
I would imagine that it was exactly how they raised their initial capital to buy rental properties: by offering public shares.

2009 Jun 05 03:09 PM

[Old Trader]

Baboon,

That would depend on the cap value being placed on the property they're purchasing (a higher price relative to the rental flow). If the price is "right", there may be no dilution. However, what seems to be happening in the sector over the last 6 months, or so, is the issuance of shares to buy-down, or refinance debt incurred during the real estate boom. This IS most assuredly dilutive. Hope this helps answer your question/comment.


On Jun 05 03:09 PM Baboon wrote:

>

2009 Jun 05 05:54 PM