Danger Ahead for REITs- By: Andy Denton
REIT investors realized that for this year, the underperformance of their portfolios would likely continue. Real estate investment trusts allow them to profit from several types of properties like hotel, regional malls, industry, shopping centers, office properties and housing REITs. But the past year has caused upheaval in Wall Street As businesses have been capsized by the recession, more commercial spaces were not absorbed by the market and have remained vacant for the past months.
Obviously, fewer leases have deteriorated the yields of REITs. In fact, not even Black Friday or the long holiday sales in malls and shopping centers can salvage their performance. You can check the bleak sales that commercial establishments posted this season when consumers are supposed to fire up purchases on discounted items. The more slack periods there are in real estate, the less return the REITs are going to make. The latest Commercial Real Estate Indices report that in September, national commercial real estate prices were down by 0.6 percent YoY. Among the regions, the biggest drop was registered by Pacific West with -4.1 percent YoY.
Naturally, REIT returns are adversely affected. According to The New York Times,
All REIT property types have been hit hard. This year through Thursday, the industrial sector was down a staggering 81.11 percent; lodging and resorts dropped 66.57 percent; and regional shopping malls were off 66.34 percent. The best performer ó that is, the sector with the smallest losses ó was self-storage, down 14.59 percent.
The once high-yielding REITs like ProLogis Trust, Kimco Realty Corp. and Developers Diversified have brought in lethargic returns this year along with other investment trusts. Since companies that issue REITs are required to derive 75 percent of their income from rent or mortgage interest or 95 percent of their total income from interest and property proceeds, most real estate companies failed to pay their debts. Not even refinancing was feasible option to resort to. Another setback is the collapse in property values that has continued to deteriorate both residential and commercial real estate. Should companies opt to sell their properties, the takings wouldnít be enough to cover existing losses.
On a different note, the National Association of Real Estate Investment Trusts (NAREIT) finds a bull in the REIT markets amidst falling property values. Because of appraisal lag or the period where declines donít appear yet on appraisal-based indexes until appraisers include the declines in their new appraisals, equity REITS have posted higher returns since February of this year. The bullish prospect of these trusts depends on the period where declines donít show.
It must be noted that the NAREIT is composed of businesses owning income-producing real estate so the organization may show such optimism in the markets even if their computations show REIT returns resisting the drag of the crisis. However, such conclusion can backfire with their own data from the NAREIT U.S. Real Estate Index showing how REIT end-of-month values have fallen dramatically from 149.57 in August to 80.29 in November.
In fact, December 23ís price still hovers at 87.88. Credible numbers canít lie, not even how REIT issuers strive to market their services to gain sales during a bleak economy. For this, we remain bearish in REIT returns for the coming year.
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Andy Denton is the COO of www.Realty.com.
Realty.com is a real estate search portal, dedicated to connecting home buyers and sellers to trusting real estate services. Follow the Realty.com blog for up to date housing news and trends. And monitor local mortgage rates at RealtyGadget.com.