Apartment REITs Benefit From Housing Crisis
I’m an optimist. Ask anyone in my family. I always have been and probably always will be. Sometimes being an optimist can hurt you as an investor. You might overlook a small detail that another investor would see as a huge problem. I know this, and that’s why I always try to go the extra mile in my research. I’m constantly forcing myself to look at and understand all of the risks.
However, sometimes being an optimist can really pay off.
I have the perfect example. Right now, the news continues to highlight just how bad the housing market is. From foreclosures to falling home sales, tightening credit markets, bank write offs, hedge funds collapsing . . . the list goes on and on.
I’ve been warning investors to stay away from the real estate and financial industries for months now. Those who listened saved themselves from huge losses and many actually made money.
Despite all the doom and gloom I recently found a bright spot in the real estate market. That’s right, some positive news has caught my eye . . . and I’ve figured out a way to profit.
Just this morning, Bank of America (BAC) announced earnings. Their profits fell 77%. And they had another $3.3 billion in loan write downs. Yet another seeming victim of the real estate mess.
The part I found funny was CEO Ken Lewis’ comments, “[t]hese results clearly did not meet our expectations.” Really? I hope not. Ken should be looking for a new job if he thought destroying profits by 77% was a positive expectation.
The fall-out continues.
The National Association of Realtors (NAR) recently published a report on the condo market. They looked at 59 different areas. 44% of these markets recorded falling condo prices. What’s really scary is that in a few of these areas prices dropped 10% or more.
To top it off, NAR also released the Pending Home Sales Index recently. In February the index fell 21% from the same time last year. And the chief economist for NAR anticipates new home sales to be down 25% for 2008.
I could give you about a hundred more data-points. But I don’t want to bore you.
No doubt, you see the problems first hand in your own neighborhood. More and more houses on the market. Bank owned real estate and foreclosures falling into disrepair. I guess you can say the market’s a bit tough out there.
But I did find a bright spot. See, I told you I’m an optimist.
Now, losing your home is a horrible event. My heart goes out to all of those who are caught with falling home prices and increasing mortgage payments. But there is a bright spot for investors. All of these homeowners need someplace to live.
And mom and dad only have so much patience with inviting children back into the home.
The National Multi-Housing Council (NMHC) is a group representing apartment owners and developers. They note that from 2004 to 2006 more than 1.2 million households became renters. They also point out that because of the real estate turmoil home ownership numbers are declining. With ownership declining, demand for apartments is increasing.
Here’s The Opportunity
The number of renters is expected to grow by almost 4 million households over the next 10 years. To meet this demand we need an additional 250,000 new apartments every year . . . for 10 years. Right now there is a shortfall. The current rate of new apartment development is around 150,000 units.
We’re falling behind by 100,000 apartments every year. And you can’t just toss up an apartment complex. The development and building process takes years. At this rate, it won’t be long till apartments are in high demand.
But it gets better.
According to one industry statistic, rents increased by 3.5% in the fourth quarter of 2007. And most importantly, vacancy rates are stable or falling.
Do you see where I’m going with this?
Rental prices are poised to increase even more. When rental rates increase, owners of apartment complexes make money hand over fist. We’re in the early stages of a growth cycle for apartment owners. One of the best ways to profit from this trend – aside from owning your own apartment complex – is to buy REITs that own apartments. Two of the largest are Equity Residential (EQR) and Avalonbay (AVB).
Equity Residential (EQR) owns more than 570 properties in 24 different states. All told, they manage more than 150,000 apartments. The company has a market cap of more than $11 billion and pays investors a nice yield of 4.5%. In February the company confirmed their 2008 guidance with analysts.
The other REIT to look at is Avalonbay (AVB). This company owns more than 160 apartment complexes in 10 states. They actively manage more than 45,000 apartments. Avalonbay has a $7.7 billion market cap and a yield of 3.5%.
Either of these companies provides great exposure to apartment REITs. I think this is a great way to take advantage of the real estate mess and make some money.
Category: Bonds
