Is There a Bottom in Sight for REITs ETFs?

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 |  Includes: ICF, VNQ
by: Tom Lydon

REITs, real estate investment trusts, and their related ETF have faced the headwinds of the economic downturn more than most sectors, and investors are watching for the news when REITs begin reporting second-quarter results in coming weeks.

Many investors have been disappointed with the performance of their REIT investments, thanks to both a deep recession and tight lending, explains John Spence for The Wall Street Journal. REITs allow investors to access the commercial real estate market, which involves apartments, storage facilities, skyscrapers and shopping malls.

Is there a bottom in the REIT market, though? Spence has a few points on why the winds may not be turning yet for REITs:

  • The poor performance of REITs have to do with credit markets freezing and economic pullbacks. Weak economic fundamentals must be solved before the REITs can turn around.
  • REITs have massive amounts of debt they need to roll over or refinance in coming years. Meanwhile, property values and rents are weak, and tenants are falling on hard times.
  • According to Fitch Ratings, REITs face tenuous financing available across the capital markets, deteriorating performance in commercial real estate and the sizable overhang of debt maturities for equity REITs looming in 2011.

Although the troubles may seem large, there could also be positives in the real estate markets that will help REITs:

  • Investment opportunities can be realized as distressed private operators and banks with bad loans offload properties.
  • A possible acquisition boom in REITs may materialize, similar to what happened in the 1990s.
  • Investors will be looking for any news on the deleveraging process and economic trends when REITs begin reporting second-quarter results in coming weeks.

iShares Cohen & Steers Realty Majors Index Fund (NYSEARCA:ICF): down 16.4% year-to-date

Vanguard REIT ETF (NYSEARCA:VNQ): down 13.8% year-to-date