HOW TO PLAY IT-Bottom feeding on real estate
By Melvin Backman
Aug 6 (Reuters) - As the global economy grinds through a slow recovery, some investors are returning to the sector that led to the downturn in the first place: U.S. real estate.
Residential real estate is showing some signs of life but continues to struggle in the wake of the Great Recession, which started with the meltdown of the housing market and mortgage-backed securities in 2008. Construction on new homes in June rose to the highest level in four years. But new home sales fell by the most during that month than they had in a year.
These fits and starts point to a part of the economy that may be starting to recover. Many professional investors see opportunities to take advantage of a market poised for growth.
The following are some ways to get into real estate now:
Real Estate Investment Trust funds, or REITs, which invest in property and generate profits as dividends, are the easiest play on the real estate market. Their dividends offer a stable source of income for those put off by stock market volatility and slow growth in other investment areas.
REITs are performing better than major economic benchmarks. The MSCI U.S. REIT Index, which measures real estate investment trusts, is up 17.9 percent for the year through Friday, besting the benchmark S&P 500 stock index, up 10.6 percent over the same period. By contrast, 10-year U.S. Treasuries are yielding a nearly flat 1.54 percent, and some central banks, like Germany’s, have bonds with negative yields and charge depositors to hold their cash.
Ground zero for the housing crisis was residential real estate. However, home prices may have recently bottomed out in June, according to data from Zillow, a real estate pricing website. Home prices increased a tepid 0.2 percent in the second quarter compared to same period last year, posting their first year-over-year increases since 2007.
But some investors say that it's too early to invest heavily in residential properties.
“There’s a lot of bottom fishing," said John Diaz, a certified financial planner at Premier Advisors, which has more than $350 million in assets under management.
Diaz's firm concentrates its real estate portfolio in REITs that track commercial real estate, especially healthcare properties. He likes healthcare REITs because aging Baby Boomers are filling nursing homes and other long-term care facilities as they live longer.
New York Consolidated's Health Care REIT Inc (HCN.N) is one example. The publicly traded REIT is up 12.2 percent year-to-date. It trades at a price-to-earnings multiple of 74.9 and generates a dividend yield of 4.76 percent. Another such REIT is Healthcare Realty Trust Inc (HR.N), which is up 30.7 percent year-to-date, trades at 302 times earnings, and generates a dividend yield of 4.9 percent.
OTHER REAL ESTATE VEHICLES
Andrew Altfest, executive vice president of strategy and investments at Altfest Personal Wealth Management, which manages $800 million, said the yield-seeking frenzy around REITs has driven him away for now.
"Returns in REITs are not going to make people happy," he said. He added that he still likes real estate as a means of hedging inflation and diversifying a portfolio.
Altfest prefers investments like Third Avenue Trust's (TAREX.O) $1.6 billion Real Estate Value Fund, which has a 1.15 expense ratio. It is up 21.9 percent for the year.
Debbie DeMatteo, co-founder and chief investment officer of 10-15 Associates, which manages $400 million in client assets in Goshen, New York, said she steers real estate-hungry clients into ancillary investments like homebuilder stocks if they are looking for ways to play real estate without betting on a nationwide robust recovery.
Shares of Lennar Corp (LEN.N), for instance, are up 53.1 percent for the year through Friday's close. The company, which operates mostly in the Southeast and some Western states, had 22 percent year-over-year revenue growth in the second quarter and 30 percent annual growth in the quarter prior. Shares of Pulte Group Inc (PHM.N), another favorite, are trading up 81.9 percent for the year. The nationwide homebuilder's year-over-year revenue was up 15 percent in the second quarter.
DeMatteo also favors exchange-traded funds like the $1.36 billion SPDR S&P Homebuilders (XHB.P), up 25.7 percent for the year, that give her clients exposure to homebuilders as well as housing-related plays like Home Depot (HD.N) and Williams-Sonoma (WSM.N). The ETF has a 0.35 expense ratio.
REITs hold property directly and thus receive more hands-on attention from their managers, while ETFs own investments that could include real estate but are not limited to it. Investors should keep this mind when seeking ETFs for real estate exposure.
For those not scared of exposure to the struggling property market, there are opportunities in commercial real estate.
Dan Puchi is director of business development for Baceline Investments, which bought $149 million in commercial property since 2003. His firm invests in holdings like shopping centers that he says are an alternative to residential housing.
“People are looking for investment vehicles that are non-correlated to the public markets,” he said.
Baceline set up the Distressed Real Estate & Debt Opportunities Fund in 2009. It’s a collection of Midwestern shopping centers worth $23.9 million and has a 1.5 percent fee. For example, Puchi's fund flipped a South Bend, Indiana shopping center in 2010 for a 107 percent return after buying it earlier that year for 40 cents on the dollar and selling it to a medical group.
The other properties in the fund are still on the market, some of which were purchased as far back as 2009. Such real estate is risky because a glut of available property means selling those shopping centers may make it hard to move.
But that's not stopping investors like Puchi. Real estate, ground zero for the financial crisis, may now offer some treasure for investors, he said.
"I see lots of opportunities over the next four years," he said.
(Reporting by Melvin Backman, David Randall, editing by Walden Siew and Kenneth Barry)
((Melvin.Backman@thomsonreuters.com)) Keywords: REALESTATE INVESTING/
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