Watching the pulse of the Real Estate market via a REIT

For those not familiar, an REIT (Real Estate Investment Trust) is just like a stock or more specifically like a mutual fund.  REIT’s are administered by the trust fund’s manager.  That manager is responsible for selecting various real estate projects that will produce profits for the trust fund and in turn, dividends for the trust fund (stock) holders.  The various real estate projects can be mortgage companies, condo projects, large apartment complexes, commercial units, industrial parks, etc.  The trust fund makes its money by investing in those projects and sharing in the returns with the property owners.  It is more complicated than that, but that is the general overview.

Obviously, the trust fund manager’s job in making the REIT profitable is to select the best real estate investments.  In “up” economies, the pickings are large with high profits, and in “down” economies, the pickings are small with low profits.  That can be seen in the Dow Jones graph you refer to.  http://finance.google.com/finance?tkr=1&q=.REIT  Back in its heyday, mostly due in part to the availablity of mortgage money, real estate across the country was very profitable, so REIT’s were profitable and an excellent place to put your money in the stock market.  Looking at the five and ten year trends, those trust funds have been on a steady climb.  However, looking at the past year, the trend has been down but still higher in the overall picture.  Looking at the beginning of this year, the numbers were at the highest levels ever at 1,134 (an average of all REIT’s).  There had been a slow, steady decline since that high and the average finally hit rock bottom in August at 851, a 25% drop.  Since August, the trend has been back up.  As of Friday, October 19, the average for all REIT’s was 938.  That falls in line exactly with the timing of the sub-prime mortgage market fallout and the steady decline of the real estate industry as a whole.

As many surmise, those REIT managers have their “finger on the pulse” of the real estate market.  Because it is their job to make the trust fund profitable, the managers select real estate investments in the best areas.  Those investments are all across the states and in other countries as well.  The trick is to find the most profitable investments.  Each trust fund manager has their own strategy, but you can bet they are noticing the upturn in our local market as well as other markets like in Dallas, Houston, Atlanta and New Orleans.  Those markets are up, and as a result, the REIT’s numbers are rising up too.  That trend is something mortage companies are noticing as well.

The real estate market is on the rebound.  In fact, today’s Indianapolis Star included yet another article from sources stating that now is the best time to buy in the local market.  And, “Consumers who take advantage of this excellent buying climate to purchase a home will find that it is the best investment they ever made”.  Prices are at rock bottom and the only way they have to go is up.  Couple that with mortgage companies rebounding and buyers ready to jump in, and we are at the threshold of an investor’s dream market.

I did a little more REIT market research for you.  As I expected, the information available is somewhat specific, but still generic.  I tried to get a prospectus online for these funds but they were not available.  Although the information is not specific, I found it interesting that every one of the top funds have Simon Property Group in their portfolio.  Simon is based out of Indianapolis with several retail malls and strip centers throughout the midwest including several here in the Indianapolis metro area.  Simon Property Group is a huge company and tracks real estate closely.  If the REIT fund managers like Simon enough for each of those managers to pick Simon for their funds, I believe that is saying something for the local company and local real estate market.  I think it is safe to say that the REIT fund managers like what Simon is doing.  Below are the top 4 REIT funds and the percentage of holdings in each.  I got the following information from www.forbes.com.

Top Holdings for Fidelity Real Estate Investment Portfolio:
 
Starwood Hotels & Resorts Worldwide Inc (HOT)  10.45%
 
ProLogis (PLD)  9.37%
 
Simon Property Group Inc (SPG)  9.02%
 
Equity Residential (EQR)  5.76%
 
Public Storage (PSA)  5.58%
 
Holdings data through 7-31-2007.

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Top Holdings for Alpine Realty Income & Growth Fund :
 
Vornado Realty Trust (VNO)  5.33%
 
Simon Property Group Inc (SPG)  5.04%
 
Boston Properties Inc (BXP)  4.81%
 
Starwood Hotels & Resorts Worldwide Inc (HOT)  4.32%
 
iStar Financial Inc (SFI)  4.21%
 
Holdings data through 6-30-2007.

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Top Holdings for Morgan Stanley Institutional Fund :
 
Simon Property Group Inc (SPG)  9.38%
 
Host Hotels & Resorts Inc (HMT)  7.67%
 
Equity Residential (EQR)  7.62%
 
Boston Properties Inc (BXP)  5.94%
 
Brookfield Properties Corp (BPO)  5.31%
 
Holdings data through 8-31-2007.

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Top Holdings for T. Rowe Price Real Estate Fund:
 
Simon Property Group Inc (SPG)  5.56%
 
Equity Residential (EQR)  4.01%
 
Macerich Co (MAC)  3.71%
 
General Growth Properties Inc (GGP)  3.41%
 
Host Hotels & Resorts Inc (HMT)  3.36%
 
Holdings data through 6-30-2007.

-B

Posted by Clayton October 2007

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