Readers of my previous article would know that i think there are certainly some bargains on the REIT front. In this article, Eric Roseman summarizes what happened, why REITs got hammered and whether there are opportunities out there.
One of the biggest casualties of the global financial crisis is the big bust now underway in REITs, or real estate investment trusts. Until mid-2007, U.S. REITs dominated global investment performance in the post-2000 technology stock “bubble” era with eye-popping 25% annualized returns.
International REITs were even more profitable, especially for dollar-based investors as foreign currency returns boosted profits combined with rising dividend distributions. A blizzard of international and regional REIT mutual funds and exchange traded funds (ETFs) were launched since 2005 as global demand went off the charts.
Singapore and Western Europe spearheaded some of the most impressive returns over the last several years with eye-popping double-digit annual gains, including a profitable recommendation for one of Singapore’s largest and oldest commercial REITs two years ago in The Sovereign Individual.
The REIT Crash
Since the onset of the subprime mortgage crisis 14 months ago REITs have plunged in value – with the biggest declines occurring in Europe, Eastern Europe and Asia.
REITs have boomed recently in the Pacific whereby recent legislation was introduced permitting REIT structures over the last seven years in Japan, Singapore and Hong Kong.
But in Singapore, REITs have plummeted more than 15% over the last 12 months and are down in excess of 45% in Australia. In Japan, J-REITs have tanked almost 30% over the last 12 months and remain 25% off their best levels in the United States.
Too Much Supply, Lack of Credit
The turning point for REITs occurred in early 2007 as the “bubble” began to simmer following an enormous number of new offerings worldwide. Fueled by the lowest interest rates in a generation combined with easy credit, REIT sponsors went hog-wild.
Supply and demand always dictate price action for any secular trend; in this case, REIT initial public offerings or IPOs were all the rage across the United States, Europe and especially Asia starting in 2005. Any observant investor could have easily identified that trouble was brewing in early 2007.
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