NATIONAL NEWS - Will REITs benefit from the weakness in home ownership? Falling prices, tighter credit and rising foreclosures have taken their toll on the U.S. housing market, but there is one residential sector that could actually benefit from these economic woes: multifamily rentals. The reasoning seems simple enough. "People still need a place to live," said Richard Anderson, a senior real estate analyst at BMO Capital Markets, adding that "a bad homeowner could be a very good renter."
Indeed, occupancy rates for apartments have remained stable, averaging in the mid-90 percent range, and rising in some cities, industry reports show. Home ownership, meanwhile, has fallen steadily nationwide. The ownership rate slipped to 67.8 percent at the end of 2007 from a peak of 69.2 percent in 2004, according to the Census Bureau.
Some would-be buyers are now waiting for home prices to bottom out, while others are finding it harder to get a mortgage after the shake-up in the subprime market.All these factors seem favorable for landlords, but only lately have shares of apartment operators and, in particular, the real estate investment trusts that own and manage these multifamily developments, begun to reflect the trend. Many apartment REITs traded near their 52-week lows not too long ago, though they have been moving higher recently.
"People had been painting residential with a broad brush, and that's what held back the stocks in 2007," Anderson said. Many skittish investors seem to have eschewed all companies in the housing market, even those involved in rentals. "Now they may be looking for ways to play the residential market," he said, "and one way to do that is to take a look at the rental business, which is once removed from the broader housing turmoil going on."
Apartment REITs, which had average losses of around 25 percent last year, are up 15.6 percent, on average, this year through last Thursday. (All property-holding equity REITs are up 3.2 percent, on average, according to the National Association of Real Estate Investment Trusts, while the Standard & Poor's 500 index has lost 9.4 percent.) So should investors be giving these REITs a closer look?
Haendel St. Juste, an analyst at Green Street Advisors, a research and consulting firm specializing in the REIT industry, says he thinks that there may be some good values. He estimates that apartment REITs overall are trading at an 18 percent discount, on average, to their net asset value. "Some are trading at very compelling discounts," he said.
But Ross Smotrich, an analyst at Bear Stearns, says investors should probably wait before they buy. "I think it's still premature," he said. "I think we're about 18 months away from where the market will start to improve." Smotrich says he believes that apartment REITs face potential obstacles despite the auspicious fundamentals. "There's growing concern about softening job creation in 2008," he said, which can affect rental demand. The Labor Department estimated that the nation lost 63,000 jobs in February alone.
But, he said, "the big issue is competition from unsold single-family houses and condos," particularly in weaker markets like South Florida, Phoenix and Las Vegas and parts of the Northeast. "The landlords will have less pricing power there." During the condominium-conversion boom from 2004 through 2006, about 331,000 apartments were sold to condo converters, according to Real Capital Analytics, but 31,500 units have since reverted back to rentals.
Anderson of BMO agreed that "this state of the economy is going to create a cloud of uncertainty," though he was more optimistic about apartment REITs. "I'm not suggesting the sector's out of the woods, but it's not an entirely grim situ
Source: AllHeadlineNews.com