|
|
|
|
Who We Are
Money Focus Mutual Funds Insurance Mortgages Taxes Step by Step Hot Topics Contact the Editor
Featured Site AfterHourTrades.com, Inc. Featured Columnist: |
Zero in the Zoned:
How The REIT has become Misunderstood.
Many public companies - REITs can be held privately or traded like stocks or mutual funds - sought to increase this diminished capital base by issuing more stock and when they did so, they diluted the shareholder base. Now fast forward to 2005, a time that has seen historically low interest rates designed to stimulate the economy, a long period of housing growth and a significant shift away from renting to owning. More recently, there has been a period of gradually rising interest rates designed to take the steam out of the market. Although Alan Greenspan won't say so out loud, the result of his measured increases in the short term overnight interest rates, the rate banks lend to each other, from 1% a year ago to 3.50% as of this writing, has pulled some of the speculation out of the marketplace.
But the cost of replacing housing - the building of shelter for the newest people in the workforce or for those who need to relocate - has become incredibly prohibitive. The square foot price to build new units exceeds the ability of landlords to charge new tenants in some areas by 10 to 1. In other words, it might cost $500 to $1000 a square foot to build a unit for rent would force landlords in a soft rental market charge only $50-$100 per square foot in rent.
So real estate trusts have been focused on building units to sell such as condominiums. The result of this change in the market dynamics has forced REITs to look for cash for development in different locations other than through equity offerings. They have begun, and with great success I might add, entering into joint ventures using money from overseas investors, US institutions and private accounts.
This has led to an increase in reported earnings and because the expansion was not achieved with additional shares in the marketplace makes the move by many of the best REITs especially rewarding. The question is, should you be looking at REITs now?
There are several things to take into consideration but if they align themselves in just the right way, REITs could continue to prosper the way they have for the last seven years running.
If the economy is good and liquidity (or the available money for investing) remains healthy and if the supply has been correctly calculated, REITs should have a good long run ahead of them. Let's take a look at those components:
Liquidity is a byproduct of low interest rates. Low interest rates, and yes, even at 6% rates can still be considered low, folks will borrow to get what they desire and housing is usually at the top of most people's list.
When you hear all of the talking heads reporting on a bubble in housing, it is usually the result of liquidity or actually lack of it. When bankers are throwing money at borrowers it is consider a highly liquid marketplace. In less liquid markets, REITs suffer as money is usually reallocated into troubled industries or investment opportunities that take investable money away from real estate.
Supply, especially in the Zoned zones of the country, the urban areas with fixed boundaries and limited expansion opportunities, can be another catalyst for REITs. The right amount of available properties can overcome liquidity problems. If there are only so many places to build within the city limits, supply will be squeezed and prices will stay high. Which is why so much of the so-called housing bubble is within areas whose boundaries prohibit unlimited expansion. As housing moves further into rural landscapes, the cost of building shrinks because there is available to land to spread out and expand.
Supply however can be difficult to determine. Builders want to continue to create new properties but if demand wanes because of liquidity issues or the buyers perceive a weaker economic environment, too many offerings will negatively impact a REITs performance.
Right now, the economy is humming along, although there appears to be warning signs that it has seen the best part of its run. Liquidity is tighter than it has been but it is still not slowing a lot of folks from getting into first time houses even at 6%. Although there is still a large amount of creative financing going on, REITs themselves are nonplussed about how the house is sold - just so long as it is.
And supply in heavily populated urban areas is still at a premium. The only dark lining in this otherwise silver cloud could be the affordability index. When houses become too expensive to buy, as they have become right now, new housing starts begin to slow and turnover decreases.
The unique thing about rates is that the next move will be good for REITs no matter what. If housing prices go down, rents will go up because folks will be unable to afford the higher cost money to buy the lower cost house. And if that happens, REITs win in both directions.
Even though most of the previous discussion was about housing, REITs tend to do best when they focus on the kinds of properties that support those who buy the houses. REITs build and buy office spaces, condos, and malls, all of which benefit when neighborhoods are on the rise economically.
Which REITs will do better in the upcoming year? Believe it or not, mortgage REITs will do the worst. But those companies with good management, good replacement costs, high rents and good markets such as in student housing, malls, and area specific office space will all fair far better when the housing market cools.
If and when it ever does!
|
