Decline in REIT Prices Is Likely to Continue

Earlier this week, I had expressed my concerns on the near–term outlook for Real Estate Investment Trusts and REIT ETFs. Last week, CreXus Investment’s (CXS) initial public offering received a cool reception. This week Apollo Commercial Real Estate Finance (ARI) and Colony Financial (CLNY) halved the size of their IPOs on lack of investor demand. This reduction in size did not however prevent ARI and CLNY shares from receiving a haircut today, their first day of trading.

The REITS are trying to take advantage of increased investor risk appetite. The supply is however hitting the market at a time when concerns of falling commercial property values, declining rents, and rising defaults are returning to the forefront and weighing on real estate investment trusts.

The current pullback in REIT ETFs like iShares Dow Jones US Real Estate (IYR), Vanguard REIT Index ETF (VNQ) or iShares Cohen & Steers Realty Majors (ICF).is likely to run its course until prices visit their 50-day moving average at a minimum.

Aggressive traders can look to profit from this continuing pullback by taking positions in ProShares UltraShort Real Estate (SRS) or Direxion Daily Real Estate Bear 3x Shares (DRV).

Disclosure: I do not have long or short positions in any of the securities discussed.

Comments

[Nyetnichevo:]

yes, srs lots of pain in cre, oversupply glut, tepid to no demand.

Sep 25 08:56 PM

[JG Savoldi:]

Our model agrees with Sam's view here. We recommended the SRS to our followers on Twitter at 9.13 on September 23rd. (link below)
Our model is suggesting that the SRS will double our entry price in October, and if the predicted stock market crash is as severe as we think it will be, the SRS could spike up to the 31.22 level (BAM magnet).

bit.ly/Dpr8N
bit.ly/4BfGHw

Sep 26 10:49 AM

[Anthony Alfidi:]

Forget about the 50-day MA and look at the cap rate instead. Evaluate a REIT or ETF like a physical piece of property. Fair value IMHO for IYR is somewhere between $20-27 depending on how you calculate the yield.

Sep 26 12:36 PM

[Random Capital:]

We will soon see an other 30%-40% down is US real estate prices.

Sep 26 01:55 PM

[Nyetnichevo:]

Sam has no position, an opinion without cash in the game is sadly lacking conviction.

Sep 26 06:53 PM

[MexCom:]

REITs have been a gold mine for me. With little risk compared to the common shares I bought piles during the market decline of REITs preferred shares. Some went down into the single digits! These are all teenagers and better and not one has skipped a dividend! Examples include Bio-Med Realty Trust, Brandywine and Digital Realty. My portfolio has outperformed the S&P and the Dow plus paying up to 4 times the dividend rate of the popular averages.

The sky is falling but as far as I'm concerned - its raining gold.

Investors gauge the future of business. Looking at the rear view mirror is not the way to make investment decisions. When these nay sayers turn positive that would be the time to sell.

Its good to see this type of negativity continue. It continues to sideline money that will later bid up prices of these investments when it becomes a foregone conclusion that things have turned and real estate values go up.

In an inflationary economy, rents will increase and income flows from these properties will increase as well. For a retiree, keeping your money in money markets and T-bills that pay close to nothing needs to be compared to my 8% plus yields still available today in some of these preferred stocks that being driven up to premiums in price.

I hold the majority of my IRA portfolio in preferred stocks traded on the NYSE – many are preferred securities of REITs.

Sep 27 09:36 AM

[REITBull:]

What are you using as a cap rate to get to $20-$27 on IYR?


On Sep 26 12:36 PM Anthony Alfidi wrote:

> Forget about the 50-day MA and look at the cap rate instead. Evaluate
> a REIT or ETF like a physical piece of property. Fair value IMHO
> for IYR is somewhere between $20-27 depending on how you calculate
> the yield.

Sep 27 10:34 AM

[Curtis Forbes:]

It's too bad all the REIT's are so similar. How about a REIT where the tenants are rewarded with REIT units each month like a company pension plan? The longer the lease they sign, the more money they get in REIT units. That also protects the REIT Corporation and doesn't require the tenants to borrow money. If they can purchase healthcare insurance from the REIT corporation by adding it to their rent, tenants will be long term so investors are protected. To bad this kind of REIT doesn't exist.

www.azcentral.com/memb...

Sep 27 12:29 PM

[John Gault:]

mexcom said "Its good to see this type of negativity continue. It continues to sideline money that will later bid up prices of these investments when it becomes a foregone conclusion that things have turned and real estate values go up."

Your statement infers that real estate values always go up. I suggest you buy a mall/strip center in Michigan, Ohio or Florida. Prices there will not reach '05-'06 levels for another 20 years.

Basically, CRE values generally go up when rents go up (admittedly there is an interest rate component). Rents increase due to lack of vacant space. Vacancy is accelerating at an unimagined pace. Sales per foot are declining at a pace NEVER before seen in CRE. We are overbuilt by degrees of magnitude and there has been a fundamental shift in the consumer.

I will think of you next year, waiting to collect your fat dividends; but instead, my opinion is you'll be delaying your retirement because of the unforeseen losses taken in the reit preferreds.

Sep 30 09:25 PM