Published 12 April 2006
Concern is growing in the US about the short-term prospects for the reit sector as the Federal Reserve raises interest rates and the sector’s reporting season is about to start.
The 10-year Treasury yield made it to 4.99% this month, putting the reit sector’s 4.1% dividend yield in the shade.
Although the likelihood of this position has been apparent for some time, the MSCI US reit index has still risen 33% this year.
In an article in the latest National Real Estate Investor magazine, Parke Chapman quotes analysts picking a decline of perhaps 10-15% in reit share prices this year. One says cap rates could weaken by 25-50 points, resulting in a 10-15% fall in asset backing, bringing share prices down by the same proportion.
Most US reits are stuck in their own backyard: they invest at home and that’s that. There’s been a certain amount of rationalisation â€“ usually with indications that it’s a positive step, not that it’s brought on by necessity – and there will no doubt be a lot more.
Some US reits have invested outside the US borders, but major US investment in foreign property has increasingly become the field for wholesale funds. Difficulties for US investors back home may constrain their influence elsewhere. Meanwhile, foreign investment in the US has been strong â€“ several Macquarie Bank funds have bought large portfolios, led by Macquarie ProLogis & Macquarie CountryWide.
Australian institutions have also bought heavily in New Zealand, taking cap rates to new benchmarks and causing a rerating through the whole commercial property sector. The question here is: How much firmer can cap rates get? The questions in the US, though, are: Have the overseas buyers been overvaluing their US purchases as that market heads into a deep trough? Or have they bought well, in a market which will exit a trough quickly?
Attribution: National Real Estate Investor, own observations & files, story written by Bob Dey for this website.