Experts are predicting that 2011 will be a strong year for Real Estate Investment Trusts, (REITs) and particularly for those running Exchange Traded Funds (ETFs).
That is to say they are expecting an even stronger year than in 2010. One can't help but be surprised by this, given the fact that on the face of it the global real estate market is still on its knees, struggling to find any way out of the down cycle. Even the same bullish experts, who are predicting strong growth, are cautioning that the underlying economics justify only a balanced market.
So what is going on? Well, put simply it is because of the floods of repossessed commercial properties and delinquent loans across the US real estate market, and in other parts of the world, including but not exclusive to the UK, Ireland and Spain, are and have been allowing well managed REITs to find their way back into the black since as early as the second half of 2009.
The fact that REIT ETFs are not representative of the entire market, but mainly of the largest properties and brands is also a factor. According to the MIT Center for Real Estate REIT ETFs saw their prices surge 19% on average during 2010. ING Investment Management (INGIM) is predicting that US and global REITs will yield 8-10% this year.
Investors should invest carefully however, because the precarious fundamentals still plaguing many markets could yet have more days in the news. Deutsche Bank sees a problem on the horizon, as many commercial properties try to re-leverage in the coming years, many of them with underwater loans. Further, Moody's reports that commercial mortgage delinquencies increased from 4.9% in 2009 to 8.79% in 2010. However, Moody's did say the rate of growth is slowing.
Those planning to invest in US commercial REITs should use extreme caution. While strong growth is likely this year, one can't help but wonder how long the fed can continue to pour liquidity into the market, and if it does so for too long whether it will result in another bubble. Around the world though, we see macroeconomic fundamentals finally starting to stabilise, with most major economies now overseeing steady employment growth, and stabilising consumer confidence, which points to rising office demand and retail demand respectively.
Experts expect the best REIT opportunities this year to come from those investing in malls being sold off cheap because of plummeting occupancy, and those still scooping up cut-price property deals in the states.
- Friday 18 March 2011