With the housing market a mess, credit tight, and default rates for commercial mortgages growing by the week, it’s hard to get excited about real estate. As the old saying goes, “They may not be making any more it,” but they’re not making any less, either. Chicago-based General Growth Properties, one of the largest shopping mall owners in the United States, found that out the hard way in December 2008 when lenders refused to refinance $900 million in maturing debt and pushed the company into bankruptcy.
This gloomy operating environment, however, didn’t deter investors from ponying up some $10 billion in new equity for U.S. real estate investment trusts (REITs) since the stock market hit a low in March 2009, according to Standard & Poor’s Rating Services. Most of those REITs then turned around and used that money to pay down debt. While some real estate companies will encounter severe difficulties during the remainder of 2009 and 2010, those that are well capitalized and astutely managed may find opportunities to acquire high quality assets at distressed prices, according to S&P Equity Research.
Allowing for the weak economic background, real estate investments have several attributes that may be attractive in late 2009. Real estate is a distinct asset class compared to equity or debt, and therefore offers meaningful portfolio diversification. Real assets tend to perform well during periods of stronger inflation, which may result from the massive stimulus packages the United States and other governments are funding. Real estate companies often pay attractive dividends compared with other companies, providing for steadier returns during periods of extreme market volatility.
More than a dozen exchange traded funds are now listed that offer exposure to the real estate market, both in the United States and internationally, as well as different sectors of the real estate market, and more exotic exposures such as leveraged or inverse funds. Just four funds dominate the market, however, with market capitalizations of about $500 million or more, compared with more specialized funds usually one-tenth that size.
On Top: Vanguard
Leading the pack is Vanguard’s REIT Index ETF (VNQ), which holds $7.4 billion in assets. It tracks the Morgan Stanley Capital International U.S. REIT index, and features an ultra-low expense ratio of just 0.15%. (Unlike most other REIT funds, the Vanguard ETF doesn’t invest in mortgage REITS -those that own loans but not physical property.) Second place goes to the iShares Dow Jones U.S. Real Estate Index Fund (IYR), which tracks the index of the same name and has about $2.3 billion in assets. iShares also lists the Cohen & Steers Realty Majors Index Fund (ICF), with $1.5 billion in assets. Slightly smaller is the SPDR Dow Jones REIT fund (RWR), with $1.2 billion in assets.