Herb Morgan (Efficient Market Advisors, LLC) submits: It’s no secret that a good portion of my firm’s benchmark beating track record of the last few years has been influenced by our decision to own REIT ETF’s. The REIT exposure of Efficient Market Advisors accounts has been primarily achieved through a position in I-Shares Cohen & Steers Realty Majors Index Fund (ICF). In the last several quarters I have grudgingly cut the ICF position in the name of risk management.
Yesterday, REIT ETFs soared in anticipation of the next buyout deal. ICF closed up 3.82% on the day, while Vanguard’s REIT Index ETF (VNQ) followed right along giving investors 3.57% between 9:00 AM and 4:00 PM eastern time. There is a certain willing suspension of reason at market tops that is only fully recognized during the hangover period that inevitably follows. My suspicion is that we are nearing this point with REITs.
Historically REIT investors are paid about seventy nine basis points above the yield on the ten year treasury. Today the NAREIT index yields 4.12% roughly seventy six basis points below the ten year yield. This metric tells me that REITs are quite overvalued with said loftiness of price being driven by deal hungry private equity players.
Investors may have been lulled by REITs behavior in recent years. Any optimization program will naively tell you that REITs go straight up with hardly a dose of standard deviation in tow. REITs have a large amount of buyout speculation priced into their shares and should be viewed with caution.