Consultants Steering Investors to Real Estate Investment Trusts
The commercial real estate market has been surprisingly stable despite economists' predictions of a rough year for the sector. Even after the troubling report on existing home sales in July (sales fell a drastic 27 percent to set a record low sales pace), analysts are seeing commercial values continue to stabilize. Vacancies are no longer rising significantly among commercial rental properties, and the majority of Real Estate Investment Trusts (REITs) are steadily reducing their backlog of debt. REITs are the primary investment vehicle for individual investors to participate in the commercial sector.
Equity investors are apparently catching on to the stability of commercial property REITs. FTSE NAREIT's All-Reit index, which is made up of 148 publicly traded REITs, has gained almost 12 percent since the beginning of the year, while the S&P 500 stock index has lost nearly 5 percent. Publicly traded REITs account for about 15 percent of the total US commercial real estate market. Further proof of investors' confidence in commercial real estate can also be found in the mutual fund market. During the first half of the year, US investors have pumped $1.4 billion into mutual funds that concentrate on real estate assets, while US equity funds have lost over $27 billion in investment capital.
This doesn't necessarily mean that the commercial side of the real estate market is completely healthy. There are still plenty of commercial loans in jeopardy of or already in default. According to Fitch Ratings, 43 percent of the 126 commercial mortgage backed securities set to mature in September are either delinquent or in some stage of foreclosure. The value of those troubled loans totals over $960 million. Since most of the properties in question with these mortgages have reduced in value over the last five years, the typical duration for a commercial mortgage, and are mostly interest-only loans, meaning the principal hasn't been paid down, most of the borrowers will be hard pressed to produce adequate equity to qualify for a refinance.
The strongest-performing REITs are typically those with higher-quality properties and healthier balance sheets. While typically costing more to invest in, these higher REITs are said to have a much higher ceiling of return. Investing consultants are advising anyone who believes a recovery will take several years to choose these higher quality REITs with lower capital expenses. The less money the REIT is paying out in the form of interest payments, the more capital on-hand they'll have to re-invest and expand its cumulative portfolio of assests.