JANUARY 2010

 

Domestic

 

Real estate investment trusts (REITs), as measured by the NAREIT Equity Index, underperformed the broad equity market in January, declining 5.2%, versus a decline of 3.6% for the S&P 500 Index.¹  All major property sectors posted negative returns for the month, as high unemployment continued to negatively impact both rent and occupancy levels and fears that turmoil in commercial real estate could derail the overall economic recovery.

 

During January, the high-profile venture between Tishman Speyer Properties and BlackRock Inc. defaulted on $4.4 billion of debt used to acquire the Peter Cooper Village and Stuyvesant Town apartments for $5.4 billion in 2006.  Faced with a massive debt load and a weak New York City economy, the group agreed to cede the property back to its creditors.²   Many private companies have been hit hard due to high leverage and their continued inability to access capital markets.

 

Elsewhere, the larger public REITs that raised capital last year ($24 billion of new stock sold in 2009) found increasing difficulty sourcing suitable acquisitions due to competition for stabilized assets in the market.³  The limited supply was a product of bank’s willingness to extend loans, rather than foreclose on properties, coupled with private real estate funds unwillingness to sell distressed properties at current values.  Delinquencies on Commercial Mortgage-Backed Securities continued to rise.  Through the end of 2009 into January, delinquencies hit 5.5% of total outstanding CMBS loans and the loss severity on liquidated CMBS reached a historical high of 52.7%.⁴  2010 could prove to be a challenging year as loans continue to be worked out or liquidated.

 

The top performing property sector within the NAREIT Equity Index for January was the self storage sector (-2.9%), which benefitted from continued concerns around the economic recovery as well as the low debt levels common in the sector.  The specialty (-3.4%), manufactured homes (-4.4%), and health care (-4.4%) sectors also fell less than the index.⁵  Conversely, the retail sector (-6.5%) underperformed for the month, as did the hotel/lodging sector (-5.7%) and industrial sector (-5.6%).  As of the end of January, the average U.S. REIT dividend yielded 4.1%, compared to the yield on 10-year Treasuries of approximately 3.9%.

 

 

 

 

International

(All returns stated on a U.S.-dollar basis)

 

International real estate securities fell only slightly less than domestic REITs in January, with the S&P Developed Property Ex-U.S. Index declining 4.8%, versus a decline of 5.2% for U.S. REITs.⁶  Within the international markets, news of Greece’s fiscal troubles and questions surrounding a potential bailout for the euro zone member weighed on the markets as the country’s budget deficit surged to almost 13% of 2009 GDP.  A bailout for Greece wouldn’t be clear-cut given that the European Central Bank and national central banks are restricted from bailing out countries per the EU’s governing treaty.⁷ Some contingency plans suggest aid from Germany and France, as well as a need to appeal to the International Monetary Fund, though this remains a more desperate alternative.⁸

 

Despite concerns about sovereign debt, property stocks in Europe ex-U.K. (-3.5%) outperformed the broad international property markets, due to relative strength in Continental Europe, as encouraging near-term growth forecasts emerged.⁹ Property stocks in the U.K. (-7.9%) significantly underperformed for the month amid higher than expected inflation.¹⁰ In January, the Asia-Pacific region (-5.0%) underperformed the international index, despite strength in Japan, which gained 1.7% during the month and benefitted from strength in the yen.¹¹ Concerns surrounding  tightening monetary policy in China weighed heavily on real estate companies.  Hong Kong stocks (-10.9%) also declined, as its property sector cooled and the area’s residential market showed signs of slowing in late 2009.¹²

  

 

¹ All performance data from www.nareit.com and www.sp-indexdata.com.

² Wei, Lingling, Tishman Venture Gives Up Stuyvesant Project, The Wall Street Journal, January 25, 2010.

³ Troianovski, Anton, Flush REITs Have Loads of Cash, Little to Spend It On, The Wall Street Journal, February 3, 2010.

⁴ All performance data from www.nareit.com

⁵ Loan Core Capital, Core Insights.

⁶ All performance data from www.nareit.com and www.sp-indexdata.com.

⁷ Cohen, Adam & Forelle, Charles, Greece’s Fiscal Worries Bring Bailout Questions, The Wall Street Journal, February 9, 2010.

⁸ Ibid

⁹ Capital Guardian, World Markets Review-January 2010.

¹⁰ Ibid

¹¹ Standard & Poor’s

¹² Ibid