The first prick in the real estate bubble could be showing up in the stock market.
Shares of real estate investment trusts have been pummeled amid concerns that continued interest-rate hikes by the Federal Reserve will eventually end a three-year run-up in prices.
REITs have lost ground in the past two weeks largely because of jabs from analysts. Jonathan Litt, a longtime real estate analyst at Citigroup Smith Barney, downgraded the REIT sector based on valuations. The group “is due for a pause in total returns as earnings catch up with extended valuations,” he wrote in a report.
Many investors have plowed dollars into REITs in the past five years as an alternative to direct investments in residential or multi-family properties. Given the boom, REITs have outperformed the broader market, with shares up an average of 30 percent or more since 2000.
Rich Moore, managing director at KeyBanc Capital Markets, believes that recent profit-taking by REIT investors won’t affect the group’s positive outlook and strong earnings growth. And he maintains that a short-term downturn has no connection to a residential housing bubble.
“I think it’s just silliness,” he said, noting that investors were taking profits because of a run-up in prices, not because of falling values.
One theme, though, is that low interest rates have fueled both markets.
Lately those have been on the rise. With rates so low, REITs have been viewed as an attractive investment vehicle for older investors looking for income-producing stocks. REITs are required by law to distribute at least 90 percent of their earnings to shareholders every year in the form of dividends, with the average REIT throwing off dividends of five percent or more.
But unlike CDs or Treasury securities, REITs can be volatile.
Over the past two weeks, mall developer Macerich Co., fell $7.01, or 9.9 percent, to $63.30, while Maguire Properties Inc. lost $3.01, or 10.1 percent, to $27 a share. (Maguire’s troubles increased last week when Warner Bros. said it would exit 73,000 square feet of office space in one of its buildings in the anemic Glendale market.)
Other locally-based REITs also got hit: Alexandria Real Estate Equities Inc. fell 5.3 percent, Kilroy Realty Corp. 5.8 percent, Health Care Property Investors Inc. 8 percent, and Public Storage Inc. 5.6 percent.
A Barron’s magazine cover story last week may have helped fuel a sell-off in office REITs, suggesting that inflated commercial property values had caused stock prices to become overvalued.
One of the issues working against the office REIT sector is the strategy of selling off older properties and trying to replace them with new ones. This has caused prices for new properties to skyrocket, leading many to view certain markets as overheated.
