Historical low returns for REITs ?

[poyet]

REITs in the US or generally speaking RE investment funds in other places of the world have historical low returns (in terms of dividend yields) at the moment, around 3% or less.

Basically, I'm requesting your opinion here with several questions ?

Do you anticipate that we will have a return to the means (kind of 7% yield) ?

If yes, how this will happen ?

Various scenarii can be envisaged, e.g. dividends (and rents) will increase slowly faster than the share price of the average REIT leading to a slow but steady increase of the yield, or will the share price collapse restoring previous higher yield levels ? other variants ?

Looking forward getting your views on that.

 

[jazz4cash]

There are several local REITS in our area (Wash DC) that yield 8-10%. Ive had an eye on them looking to see how they fare with changes in the local market, but they are generally commercial properties and less affected by decelerating residential market. Remains to be seen weather the general decline expands to commercial.

 

[jazz4cash]

Have not done this before, but lets see if this works..........

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/03/AR2006100300921.html

 

[poyet]

Yes the link does work.

To clarify a bit, I mainly address commercial RE as most REITs are invested in commercial props. I talked of the yields (retun on capital based on the dividends) on not of the returns based on price appreciation of the share of the REITs as mentioned in the papers.

 

[Nords]

Do you anticipate that we will have a return to the means (kind of 7% yield) ?
If yes, how this will happen ?

Hey, Poyet, good to see your post! I'm going to have to check your $10M reference portfolio results for the last couple weeks' momentum run.

Hawaii realtors are claiming a soft landing with 10 years sideways before rents take off again. However the slightest surprise could reprise our 1990s.

I'm starting to become interested in international REITs. What's their situation from your perspective?

 

[CyclingInvestor]

I would be very surprised if at some point in the next decade or two
quality REITs do not yield 7% or so again instead of the current 3-4% -
not because I see any particular dark clouds on the horizon, but because
business and interest rate cycles have been around as long as there
have been markets.

In 1997 REITs seemed unstoppable - valuations were almost as high
as today (higher in some cases). Then for the next 2 years their
stock price was pummelled, while profits and dividends were going up
by around 10% per year. Similar shifts happened in the early 90's and
the mid 80s.

You never know when peoples taste will suddenly shift from one sector
to another. Long term investors just have to get used to it, and not
let it get to them.

 

[Brat]

I too am investigation REITs but am not looking at mutual funds because most also include construction, building materials and mortgage companies. For a person who just wants the REIT why add the administration expense of a mutual fund?

I too would like a 7% return, but the diversified trusts that I would like to purchase are returning 5.5-5.9% at the moment. I want to be able to hold the trust for many years. I don't want those that invest in high proflie locations or where US auto manufacturers have facilities. A Norwegian widdow's holding.

I am making a list, will check it twice so to speak. When the returns start to mesh with my desires then I will pull the trigger.

 

[poyet]

Hi all, thanks for your posts and thoughts.

Well, not claiming to have any cristal ball, in my opinion we seem to have two markets right now:

- One is "China based", i.e. anything that can be manufactured in China (e.g. consumer products) and shipped worldwide will not suffer inflation or will even know deflation.

- The rest, i.e. real estate (and REITs as a kind of), commodities and companies surviving the "Chinese shift" will go through continuous inflation especially when the Chinese will also compete for these scarce resources to run their businesses (e.g. oil, metals, RE in places where consumers are located, etc).

Having said that, I would be worried that we would have no return to the means for a very long time with REITs and that the price of the properties (in consumer based locations, or where place is rare and adequate to locate businesses) will keep rising at least as fast as the rents depleting the final yield, and leaving it to where it is right now, kind of 3% after taxes.

For the REITs (or european equivalents) I have access to the data of over a 15 years period, these assets have more than hedged inflation (e.g. share price multiplied by 4 in 15 years) but the dividends have slowly moved lower, from 9-10% in 1990 to 3% in 2006, in fact the dividends have remained constant in dollar (or whatever) terms. So not only did the yield decreased but someone who would have based his revenue stream on the dividends (being ER) would have had to sell some of his shares to cover for the money erosion of the dividends over the years. This would still have been a very reasonable investment (times 4 + a series of 15 years dividends from 10 to 3%) but raises questions for someone who thinks today to take a position to generate some inflation hedged cash-flow over decades....

Of course, techniques for those who do not know where it goes are available like DCAing slowly the building of a REIT position and keeping it in terms of global proportions where one thinks it should be in his/her global portfolio to reduce global volatility and secure cash streams as appropriate, even though @ 3% it requires significant amounts to create some measurable income.

Well, looking forward to more exchange with you on the matter, these were my two cents today before returning to putting one of my warehouses in better shape after the bankruptcy of the company that rented it.

PS for Nords: the system is still not yet in the market on the LONG side. I think we should not be too far before it resumes entering in the game !

 

[Texas Proud]

One of the things that I think are not in the REITs favor is rental rates... there was a big downturn in rates after the 2000 dot com bust... however, most of the buildings were already leased to some megacorp... well, the megacorp has been subleasing at a much lower rate than what they are paying.. eventually their high lease rate will end and the renewal to the REIT will be at the market rate...

And, they are buying properties at high prices with not much ability to raise rents in the near future... again, hurting the yield..

Just my thoughts....

 

[audreyh1]

I thought rents (which have been depressed for a while now) were finally going up.

And do REITs really hold mortgage companies?

Audrey

 

[Brat]

I have found that many REIT mutual funds do hold mortgage company and construction related investments. If there is a mutual fund you are interested in click on 'holdings' and take a look. Whether or not the fund currently holds that asset is unknown, but it does reflect the manager's attitude about what the fund should own.

As indicated earlier I have been looking at REIT stock recently because I don't see the need for the additional administrative expense. However, that stock should be a long term hold because there are transaction fees.

The one area where a mutual fund would be necessary is international real estate. Perhaps others could comment on wisdom of a significant international real estate exposure.

The no-load, low fee, version of Cohen & Steers has a very high minimum investment and hasn't paid dividends. If others think the management company is primo then perhaps it is worth a look if you have $100,000 to deploy. http://www.cohenandsteers.com/ii_intlreits.asp

Fidelity (my IRA custodian) also has an international REIT that is paying a modest dividend. It is a much bigger fund that the one mentioned above and when I chart them they seem to performs similarly.

[added link]

 

[brewer12345]

And do REITs really hold mortgage companies?

Audrey

REITs come in three flavors: property owning REITs, mortgage owning REITs, and hybrids (a bit of each). Property owning REITs are what you might expect: companies that own RE, usually with significant leverage. Mortgage REITs (aka MREITs) run the gamut from guys like NLY (borrow money and buy Ginnie Maes and other MBS), to TMA (do what NLY does plus they actively originate new mortgages to prime residential borrowers), to NFI (subprime mortgage originator), to guys who do real weird stuff. The MREITs look more like banks than real estate companies. They can make a decent investment, but they are very different from the property owning REITs.

 

[audreyh1]

Here are the top 10 holdings for FRESX which represent 61% of the assets in the fund:

Top 10 Holdings % Net Assets
------------------- ----------------
ProLogis Trust 8.66
Starwood Hotels & Resorts Worldwide, Inc. 8.12
General Growth Properties, Inc. 6.93
Equity Residential 6.93
Simon Property Group, Inc. 6.63
Equity Office Properties Trust 5.24
Duke Realty Corporation 5.14
United Dominion Realty 4.98
Kimco Realty Corporation 4.63
Developers Diversified Realty 3.66

I recognize some of these like Starwood (obviously hotels and resorts!) and Simon Property Group (a mall REIT), Equity Office Properties.

I'm not sure I would recognize a "mortgage owning REIT".

I thought REIT funds mainly owned property REITs, property management companies, etc.

(Personally I don't mess with individual securities)

Audrey

 

[brewer12345]

AFAIK, all of the top 10 you listed are property REITs, not MREITs. My understanding is that most (all?) REIT funds concentrate on property REITs and exclude MREITs. I'm not sure what they do with guys who blur the lines, like SFC (owns a portfolio of very long term triple net leases).

 

[audreyh1]

Brewer:

Thanks for sharing your detailed knowledge on this kind of stuff. I really appreciate it.

Audrey