S&P Research Warns of Correction in Real Estate Investment Trusts

[TexasLawyer]

More little signs that the real estate bubble is bursting...

April 10, 2006 3:04:00 PM ET

S&P Equity Research Warns of Correction in REITs

NEW YORK, April 10 /PRNewswire-FirstCall/ -- Standard & Poor's Equity Research Services warns investors of the potential for a decline in the S&P 1500 Real Estate Investment Trusts Sub-Industry Index in the near future.

It cites a combination of technical indicators, as well as high valuations compared to historical multiples and the current underlying fundamentals as the key drivers of a potential 5% to 15% correction within the next six months. "There are a number of potential catalysts for a short-term correction in the sector, including rising long-term interest rates, an earnings shortfall from a market leader, or widespread profit taking," according to Robert Hansen, Financial Services Group Head, Standard & Poor's Equity Research Services.

"While we like the group's technicals from a long-term perspective, we do see the probability of an up to 15% correction over the next six months," said Mark Arbeter, Chief Technical Analyst, Standard & Poor's Equity Research Services. "The S&P 1500 REITs Sub-Industry Index has outperformed the S&P 500 since May 2004, and the recent strength has pushed many technical indicators to very overbought conditions. As a result, we believe there is a strong possibility of weakness over the intermediate term within the confines of a long-term bull market.

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http://news.moneycentral.msn.com/ticker/article.asp?feed=PR&Date=20060410&ID=5634069

[Vinnie From Indy]

1. When the dam breaks it will wash away thousands

All those folks that got lured into "flipping" real estate have been playing musical chairs and the music is about to stop.

[Warpy]

2. Yeppers, and that's very sad because a lot of them

were taking distressed properties and turning them into very nice properties that anyone would want.

The ones I don't feel terribly sorry for are the quick buck people who bought up new construction to sit empty so they could flip it in a year or two for an obscene profit. I hope they're all stuck with no interest mortgages that are about to balloon up on them. Serve 'em right.

It's not like they haven't been warned for a solid year by increasing housing inventory sitting unsold for months at a time.

[swag]

3. Thanks for the story.

Analysts have been calling for the end of the REIT streak since 2004, if I recall correctly. On a fundamental basis, it's difficult to see them as anything but extremely overvalued, but people (me included) keep loving those big dividend payouts.

But those big divs now have some competition in the yield game, what with yields on cash, Treasuries, and corporates continuing to rise. So investors have to look at REITs and say to themselves, do I need all this capital depreciation risk to get this yield? Or should I just buy some bonds now?

I'll be happy to buy more REITs when the group deflates. Meanwhile, I'm happy to reinvest dividends back into REIT funds, regardless of what the REIT market does.