From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘NAREIT

Rays of sunshine

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Fall isn’t usually the time we talk about rays of sunshine, particularly not here in Seattle where we all “hunker down” this time of year for the long, dark, wet winter.  Plus, I just came back from three weeks on the road (nine hotels, 4 time zones, two rental cars with a combined 2,000 miles, and four plane flights).  One of the first things to hit my in-box was the periodic Real Estate Investment SmartBrief from the National Association of Real Estate Investment Trusts with the headline “Hopes for U.S. Rebound Fade as Global Trade Slips”.  Sigh….. not a really nice headline, eh?

Now, I have the greatest respect for NAREIT, and out of fairness, they lifted this story from the Wall Street Journal.  Nonetheless, when the market opened this morning, it actually darted into positive territory, with the S&P hovering above 1450 as I write this.  (I hope I don’t jinx it!).  Of course, the stock market has risen for the past three Octobers, and in fact the market had a significant rally in September — a rarity for a month that’s usually fairly flat — with the S&P gaining almost 3% and the Dow picking up about 2% during the month.  The “rally” this morning was triggered by two things.  First, the ISM report (Institute for Supply Management) came out in positive territory for the first time in four months, confounding analysts who thought it was continuing downward.  Second, this caused the short-sellers, who have banking on a negative October, to re-think their positions.  Hence, the really great bounce this morning was, in no small part, a lot of short-covering.

No question about it — a shrinkage in global trade is an unsettling thing, for three big reasons.  First, it signals that the net importer regions (particularly Europe) are continuing in the doldrums.  Second, healthy economies which are heavily trade based (such as the U.S.) depend on trade to stimulate GDP growth.  Finally, China is the world’s biggest manufacturing floor right now, and depends on trade to provide full-employment — nothing frightens Chinese officials more than unhappy workers with no jobs.  Thus, from both an economic perspective as well as a geopolitical perspective, a shrinkage in trade — or even a shrinkage in the growth of trade — is a bad thing.

Notably, also, while manufacturing is only 20% of the U.S. economy, it is 40% of the profits of the S&P 500.  Pundits are already noting that the ISM report is just one data point, but it’s a very important one.  In the next few days, we’ll see if the good news from ISM is sustained by other sectors of the economy.



Written by johnkilpatrick

October 1, 2012 at 9:10 am

REIT Research — Real Estate in Volatile Times

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The National Association of Real Estate Investment Trusts (NAREIT) recently commissioned Morningstar to study the role of securitized real estate in the well-balanced portfolio, with a particular eye to the investor attitudes regarding risk, as well as the actual performance of markets.  Both of these two concepts — risk and investor attitudes — are less well understood than researchers seem to think.  In the first, market models assume a degree of normalcy in the distribution of market returns.  However, empirical evidence seems to contradict this, and in fact market volatility is significantly greater (and of greater magnitude) than models would predict.

In the second case — investor attitudes — traditional models suggest that rational investors react to “up” markets in the same way as “down” markets.  More recent behavioral models recognize the fallacy in this — rational investors relish “up” volatility, but loathe down markets.

The results of the research were published in an excellent new research piece from NAREIT titled “The Role of Real Estate in Weathering the Storm” (click on the title for a copy of the paper).  Some high-points from the study:

  • Since 1929, the S&P 500 has had 10 months with declines of 15.74% or more — which is eight more than would be predicted by a normal distribution.
  • Recent studies by James Xiong of Ibbotson Research show that the log-normal distribution fails to account for this down-side volatility.
  • From 2000 – 2009 (often called the “lost decade”), the cumulative return on large-cap stocks was negative 0.95%.

Morningstar then crafted portfolios under the “theoretical” model (normal distribution) versus a more realistic model of volatility, with alternative structures for risk-averse investors and more risk-tolerant investors.  Investment returns were measured over the period 1990 – 2009, which notably included the recent market melt-down.

Under normal distribution assumptions, an optimum risk-averse portfolio would allocate about 6% to securitized real estate and theoretically enjoy a return of 7.6%.  Under more realistic volatility assumptions, the risk-averse portfolio would allocate 14% to securitized real estate and would have returned 8.2%.

A more risk-tolerant investor would have allocated 18% to 20% in securitized real estate, and would have enjoyed a return of 9.7%, with volatility (standard deviation of portfolio returns) of 10%.

The most striking finding of the study was the consistent role played by securitized real estate in all four of the models (normal versus non-normal, risk-averse versus risk-tolerant) and particularly thru the market melt-down.  While this may seem counter-intuitive, given the roller-coaster ride of REIT prices, investors need to realize that REIT shares paid relatively high dividends through this period, thus ameliorating the downward price movements.  In short, the gains from real estate holdings pre-meltdown, coupled with the dividends, more than made up for the price bounce over the past few years.  Further, REIT prices have rebounded better post-recession than have other S&P shares.

Written by johnkilpatrick

September 12, 2012 at 4:56 am

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