Is it Time to Buy REITs?
Continue Reading Add comment October 14th, 2008
After soaring through much of the decade, real estate investment trusts had a disastrous year in 2007 when their downturn presaged the overall credit market collapse. Through Oct. 10 they were still down some 21% in 2008. But with the stock market now showing some life is it time to buy these real estate-related firms?
No, says Michael Kirby, director of research Green St. Advisors. Green St. follows real estate investment trusts exclusively so when Kirby says ‘don’t buy them’ it means something. Overall his buy recommendations have returned 27% annually since 1993. His sell recommendations have appreciated .3%. The average REIT returned 12% on average over that time, according to the National Association of Real Estate Investment Trusts.
Kirby’s beef is that relative to corporate bonds; REITs still don’t look like a good deal. REITs are presently yielding 5.5% versus 7.8% for corporate debt. Moreover, REITs look expensive on a price to earnings basis, trading at 18 times earnings versus 12 times for the S&P 500.
Danger looms, particularly for office REITs, as some $185 billion in mortgage debt will need to get financed in 2010-12. It could trigger massive defaults, similar to what happened in the housing market.
If you really want to buy, Green St. says look at Starwood Hotels (HOT), that’s one of its Westin properties above, warehouse owner DCT (DCT) or Post Properties (PPS), a big owner of apartment complexes in the South. They all look cheap relative to their private market asset values.
Steer clear of REITS trading at high prices relative to their asset values. These include First Industrial (FR), Strategic Hotels (BEE) and Cousin Properties (CUZ), an owner of office buildings.