REAL ESTATE STOCK FUND MANAGERS can be forgiven if they prefer to look ahead rather than back at 2008. After
all, last year wasn’t a roller coaster ride for funds—it was that
enormous drop that always scares riders.
For all of the 83 distinct real estate stock funds that Lipper
tracked in 2008, the question wasn’t whether there was a loss, but
how much. The average loss was more than 40 percent (editor’s
note: refer to REIT.com for full charts).
Likewise, the FTSE NAREIT All REIT Total Return Index
dropped 37. 34 percent during the year, the steepest decline since
the 1970s. Worldwide, real estate stock funds fared even worse.
The FTSE EPRA/NAREIT Global Composite Real Estate
Index declined 47.72 percent in 2008.
These declines were approximately twice as steep as those
in 2007, which was also a down year. However, the decline for
REITs was in line with the broader market. The S&P 500, for
instance, dropped 38. 5 percent in 2008.
What comes after such a plunge? Brian Jones, co-portfolio
manager of Neuberger Berman Securities Income Fund Inc.,
posits that the pummeling of REITs in 2008 will eventually
mean opportunities for investors. “The recession in the United
States has had an impact on occupancies and rental-rate trends
for REITs, and the credit crisis has limited access to debt capital
for commercial property owners,” he says. “Going into 2009,
both of those adverse trends will still be with us.”
However, there are counterweights to those negative forces,
Jones says. “For example, the volume of commercial real estate
construction will continue to go down in 2009, which will help
mitigate some of the demand destruction caused by the economy
and the credit freeze. Not only that, most REIT investors are
anticipating cash flows to be down in 2009—in the 5 percent to
10 percent range—but this won’t be an important driver in REIT
share prices because the market already anticipates it.”
However, Jones says the dramatic contraction of REIT share
prices from their peak in February 2007 to year-end 2008, “has
made the cash-flow multiples at which REITs trade much more
attractive today than they were at the beginning of 2008. We also
see REITs trading at discounts to net asset value, even though
we’re quite conservative with our net asset value estimations.”
THE HAVES AND HAVE-NOTS
A December 2008 report by Green Street Advisors buttresses
the case that REIT stocks are, on average, undervalued due to
the dramatic downturn of virtually all investment vehicles in
the fourth quarter of 2008. According to the report, REITs are
trading at an average 30 percent discount to net asset value, but it
cautions that such determinations are problematic in the current
market, since so few commercial property transactions have been
consummated lately.
Still, the report points to the conclusion that, prior to some
kind of recovery, some REITs could be considered undervalued.
But which REITs have the potential for a profitable comeback in
the not-so-short run? That’s the rub, fund managers say.
“Everyone got beaten up last year, but the thing we have to
figure out now is which REITs were beaten up too much,” says
John G. Wenker, co-manager of First American Real Estate
Securities Fund. The fact that REITs were hit so hard across
the board has laid the groundwork for strong recovery for some
of those REITs, he adds.
“The current environment has separated public real estate
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