Buying Opportunity In Residential REITs

| December 13, 2011 | 0 Comments

Real estate industry experts don’t agree on much these days.  For every expert that’s bullish on housing, there’s another that’s bearish.

The bears point out that these are unprecedented times.

Three consecutive years of falling home prices with more than two million foreclosures per year isn’t good.  There’s also another wave of fore-closures on the way when the state’s moratoria go away.  And banks’ strict lending standards severely limit the number of people eligible for a mortgage.

However, the bulls have an equally compelling argument.

The combination of low home prices and record low interest rates are making houses affordable.  In fact, homes are now more affordable than at any time in a generation.

By this time next year, I wouldn’t be surprised if home values had shot up 10% across the country.  But I wouldn’t be surprised if they were down another 10% either.

No doubt about it, the housing markets’ future is as clear as mud.

But that’s just part of the story…

Unlike the market for single family residences, the future of multi-family commercial real estate is something most experts can agree on.

You see, the housing market’s uncertainty is expanding the pool of potential renters.  And as more people choose to rent instead of own, apartment rents are rising and vacancy rates are falling.  It’s a trend that everyone agrees is good for apartment building owners.

It makes sense… renting more apartments with higher rental rates puts more money in owners’ pockets.

Just look at the track record… as recently as the end of 2009, 8% of rental units were sitting empty.  But vacancy rates have been falling steadily ever since.  They reached 5.6% last quarter.  And they’re expected to hit 5.5% by the end of the year.

With fewer apartments available, rents have been trending higher since mid-2010.  Some markets have seen rents skyrocket by as much as 15% over the last year.

And it’s not an isolated incident.  It’s happening in almost every major US market from Boston to LA.

The result?

Last quarter, gross revenues from apartment buildings exceeded the 2007 peak.  And property values have surged to their highest level ever.  In other words, multi-family housing is in expansion mode.

Amazingly, this trend is far from over.  According to CBRE Econometric Advisors, vacancy rates are expected to fall to 5.2% by 2013.  And rents are expected to climb even higher.

That’s great news for REITs specializing in multifamily housing.

They’re obviously making more money as rents go up and vacancy rates fall.  And their balance sheets are stronger as the value of the buildings they own climb in value.

As if that not enough, the European credit crisis has given us a great buying opportunity.

EQR owns about 130,000 apartments in the US.  And their business is doing great.  Yet the stock is down 16% from the July high.

The only reason I can see for the selloff is fear.  Investors are afraid the European crisis will disrupt the financial markets.  Markets that EQR and other REITs rely on to finance their operations.

I think the markets have overreacted.

There’s no reason for REITs specializing in apartment buildings to be down when the industry is booming.  This looks like a golden opportunity to buy residential REITs like EQR who specialize in apartment buildings.

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Category: Real Estate

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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