Judging by the stellar performance of REIT ETFs in 2010, it is
hard to imagine that real estate has barely recovered from of a
major crisis. But a predicted tsunami of foreclosures rolled in
as only a sizeable wave, and now analysts forecast solid cash
flow gains for publicly-traded REITs in 2011.
Do prices, which surged 19 percent in 2010 according to the
MIT Center for Real Estate, reflect underlying economics? At
present a neutral weighting is justified, but if REIT ETFs
continue to climb steeply, reallocation elsewhere will make more
Economic fundamentals for commercial real estate remain
precarious in many markets. Deutsche Bank foresees a huge number
of properties having to refinance in coming years with underwater
valuations (at least at todays prices). Delinquencies in
commercial mortgages bundled and sold as bonds increased to 8.79
percent in December 2010 from 4.9 percent a year earlier,
according to Moodys, although the pace of growth in delinquencies
Still, macroeconomic indicators are improving. Employment, the
single best predictor for demand for office space as companies
try to find seats for their new workers, is inching up steadily.
And consumer spending, which drives retail occupancy, is holding
steady. Also, a flood of credit from the Federal Reserve is
allowing many banks to push out loans for problem buildings. What
was derided as an extend and pretend policy may yet succeed.
Commercial mortgage-backed bonds have hit two-year highs. And
from the investors perspective, the Feds continued policy of low
interest rates has made REITs yields comparatively
As to the steepness of the price rebound, the mathematics of
price swings are always asymmetric. A modest loss in percentage
terms requires a huge gain in percentage terms for a stock's
price to rebound. Since REITs were badly beaten down, a snapback
delivers phenomenal returns such as seen in US REIT ETFs in
Mainstay US funds did well, including iShares Cohen &
Steers Realty Majors ETF (NYSEArca:ICF) at 0.35% fees and iShares
Dow Jones US Real Estate ETF (NYSEArca: IYR) at 0.48% Vanguard
REIT ETF (
) with a phenomenal 0.12% annual expense ratio.
It is helpful that REIT ETFs do not reflect the entire real
estate industry but instead just portfolios of the largest
properties and brands. Much of the carnage is occurring with
small, aggressive private equity players such as in minor Miami
condo or Phoenix mall projects. Multifamily REITs which made it
this far benefit from scooping up distressed condo and converting
them to rentals. Retail REITs are likewise grabbing half-empty
malls for pennies on the dollar.
What do the experts say now?
ING Investment Management (INGIM) expects US as well as global
REITs to deliver total returns of 8 - 12 per cent in 2011.
Despite poor fundamentals, a reversal is within sight and
investors are jumping on board.
REIT ETFs have successfully completed a turnaround play and
are now entering a momentum investment phase, much like a growth
stock mid-way into recovery. The problem is that much of the
industry has not recovered. This is an asset class known
traditionally for steady dividend distributions and modest
capital appreciation, but it is not in a traditional environment.
In mid-2009 we concluded that REITs ETF prices had fallen so far
they were at a fair market bottom. Now they are increasingly an
asset class for speculation only and are approaching their fair
market ceiling. It is anyone's guess how long the Fed can or will
want to keep flooding the market with liquidity. The last time it
did this, an asset bubble occurred.
Other broad market US REIT ETFs include:
- iShares FTSE EPRA/NAREIT North America ETF
(NasdaqGM:IFNA); 0.48% annual fees
- First Trust S&P REIT ETF (
); 0.70% fees
- iShares FTSE NAREIT Real Estate 50 ETF (NYSEArca:FTY);
Picking the right sub-sector clearly can make a difference.
Sub-sector ETFs of the above chart include:
- iShares FTSE NAREIT Industrial/Office ETF (NYSEArca:FIO);
0.48% annual fees
- iShares FTSE NAREIT Mortgage ETF (NYSEArca:REM);
- iShares FTSE NAREIT Residential ETF (NYSEArca: REZ);
- iShares FTSE NAREIT Retail ETF (NYSEArca:RTL) ;0.48%
Going international is attractive at times because it dampens
volatility and protects against dollar devaluation. Choices
- First Trust FTSE EPRA/NAREIT Global Real Estate ETF
(NYSEArca:FFR); 0.6% annual fees
- iShares FTSE EPRA/NAREIT Asia ETF (NasdaqGM:IFAS); 0.5%
- iShares FTSE EPRA/NAREIT Europe ETF (NasdaqGM:IFEU) 0.48%
- iShares FTSE EPRA/NAREIT Global Real Estate ex-US ETF
(NasdaqGM:IFGL); 0.48% fees
- iShares S&P World ex-US Property ETF (NYSEArca:WPS);
- WisdomTree International Real Estate ETF (
While not a REIT ETF, PowerShares Dynamic Building &
Construction Portfolio ETF (
), contains firms serving the housing industry though no actual
Two interesting trader's tools are expected in Q2 of 2009:
- MacroShares Major Metro Housing Down ETF (NYSEArca:DMM);
- MacroShares Major Metro Housing Up ETF (NYSEArca:UMM);
They track S&P/Case-Shiller Indexes of residential housing
in 10 major US metro areas.
Investors who want to add an active element to their strategy
should look to PowerShares Active U.S. Real Estate ETF
(NYSEArca:PSR), costing 0.8% in annual fees. PSR uses
quantitative and statistical models to try to beat the FTSE
NAREIT Equity REITs Index, and it generally makes changes once a
month. This is basically the same as a fundamental, semi-active,
or intelligent ETF and is worlds away from subjective individual
Finally, traders can make directional, leveraged short-term
bets on REITs with:
- ProShares Ultra Real Estate ETF (
); 0.95% annual fees
- ProShares UltraShort Real Estate ETF (SRS); 0.95%
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.