RCA in the commercial property press:

REITs - Blind Pool Party

Forbes reports: It was just over a year ago that the NAREIT index of REIT shares hit bottom after dropping 75% from its peak in February 2007. It has since rebounded 94%. A nice start, but prices would have to better than double from today's level to get back to where they were.

With hindsight, the bubble in commercial real estate looks pretty absurd. Purchasers of commercial property were so convinced that rents would go up forever that half-empty buildings changed hands at higher prices than those filled with solid rent-paying tenants.
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Now those same investors (pension funds, insurance companies and private equity groups) are returning to the market with a little more attention to the rent rolls. REIT shares, meanwhile, have gotten a bit ahead of building values. As REIT shares were climbing, property prices were falling 43%, according to the Moody's Real Commercial Property Price Index. While I still like real estate investment trusts, I can't describe the sector as a whole as any great bargain.

My four columns in 2009 benefited from the REIT rebound. Had you bought all 24 recommended stocks, including 8 holdovers from the previous year, you would have enjoyed a 37% return (including dividends and after a 1% haircut for transaction costs on new positions). Had you put the same money on the same dates into the S&P 500 (without a transaction cost) you would have been up only 23%.

One of the reasons that REITs have outperformed other owners of real estate is that they use less debt and manage their properties more carefully. So REITs can now be buying. Real Capital Analytics estimates that there are more than $160 billion of troubled properties out there. Potential buyers have been drooling in anticipation of getting nice discounts on assets that fall into bankruptcy or other distress.

Articles related to this topic:

 Flush REITs Have Loads Of Cash, Little To Spend It On
 REITs See Gains in February
 Australia REITs Have Funds, Hunger; Eye Overseas Assets
 Manhattan Office Sector Headed for a Rebound
 JPMorgan, UBS Property Funds May Get $100 Million Investments

Posted by: Nina Turner

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