Why are REITs not providing any benefit in this market?

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InvestorNewb
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Why are REITs not providing any benefit in this market?

Post by InvestorNewb » Wed Jan 20, 2016 9:58 am

REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
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Re: Why are REITs not providing any benefit in this market?

Post by livesoft » Wed Jan 20, 2016 10:01 am

Because REITs are not bonds.
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Re: Why are REITs not providing any benefit in this market?

Post by rmelvey » Wed Jan 20, 2016 10:07 am

Who told you that? People used to write that before the financial crises, not so much anymore. REITS are a leveraged investment, and do poorly in a deflationary environment the same as any other equity.

I think the idea that they are different comes from the fact that they didn't participate in the tech bubble and the subsequent crash. That is something that I wouldn't extrapolate into the future though...
Last edited by rmelvey on Wed Jan 20, 2016 10:10 am, edited 1 time in total.

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Re: Why are REITs not providing any benefit in this market?

Post by nelson1015 » Wed Jan 20, 2016 10:09 am

This is speculation but I believe real estate is at a peak due to being propped up by low interest rates. I don't expect much lift in real estate prices / sector in the near future.

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Re: Why are REITs not providing any benefit in this market?

Post by RNJ » Wed Jan 20, 2016 10:11 am

livesoft wrote:Because REITs are not bonds.
Also, as has been pointed out by Larry and others, in times of market stress, the correlations of risky assets (including REITS) tend to rise.

Be careful out there :wink:

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Re: Why are REITs not providing any benefit in this market?

Post by zaboomafoozarg » Wed Jan 20, 2016 10:14 am

REITs tend to drop more than total stock market, and gain more than total stock market. Though not always.

Use the difference in increases and decreases to rebalance. Voila, there's your benefit.

If that's not good enough for you, maybe you need a few percent in bonds too. Last I knew you were 100% stocks (and have asked this same question before).
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Re: Why are REITs not providing any benefit in this market?

Post by nisiprius » Wed Jan 20, 2016 10:17 am

You probably didn't hear what you think you heard... or you heard it through a chain of people who each distorted it. And quite possibly they distorted it in order to promote something. And you might have layered your own wishful thinking on top.

In the twenty-year lifetime of the Vanguard REIT Index Fund since 1996, most of the time it has zigged and zagged the same way as stocks, only more so. But there was one great shining moment, 2000-2002 when stocks went down significantly while REITS went up significantly.

Happy moments like this get encapsulated in happy talk like "REITS tend to soar when stocks fall." If the right verb tenses had been used, the story would have been "REITS once went up when stocks fell."

More formally: the idea of correlation is often presented in a very misleading way. Most of the statements about correlation, if presented honestly, would go something like this:

a) X does not have perfect correlation with stocks.
b) But why should I care?
c) Because if X had negative correlation with stocks, then it would zig when stocks zag.

What "benefit" did REITS provide in 2008-2009? Total Stock fell 52% (i.e. lost about half of its value) while VGSIX fell 63% (i.e. lost about two-thirds of its value).

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Re: Why are REITs not providing any benefit in this market?

Post by alex_686 » Wed Jan 20, 2016 10:22 am

InvestorNewb wrote:REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
And why do you not say we are getting good diversification? What measure are you using? Or are you just eye-balling it?

FYI, IIRC the correlation between stocks and REITS is about .4 and between stocks and bonds is about .2 - through these values do drift. The point being is that the correlations are positive. If you want something to zag when the market zigs you are going to need to find something with a negative correlation. Good luck with that - there are not many out there.

Plus correlations tend to break down in times of stress.

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Re: Why are REITs not providing any benefit in this market?

Post by alex_686 » Wed Jan 20, 2016 10:29 am

nisiprius wrote:What "benefit" did REITS provide in 2008-2009? Total Stock fell 52% (i.e. lost about half of its value) while VGSIX fell 63% (i.e. lost about two-thirds of its value).
Nisiprius, you have your logic backwards. The question you want to ask is "What benefit did stocks provided in 2008?".

In 2008 crisis was triggered by the real-estate bubble popping. This had obvious effects on REITS, but what effects would a real estate crash have on the stock market? In this case it had a big impact. However this does not always happen.

A better question is how well REITs react to the stock bubble crashing. I will point out that REITS did pretty good during the 2001 dot.com crash.

I firmly believe that REITs are a good diversifier against the S&P 500.
Last edited by alex_686 on Wed Jan 20, 2016 10:47 am, edited 1 time in total.

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Re: Why are REITs not providing any benefit in this market?

Post by dbr » Wed Jan 20, 2016 10:36 am

The idea that anything "zigs" when something else "zags" is an oversimplification of the concept of correlation in investing that can lead a person to just flat-out mistaken thinking. It is also an example that is amazingly given by some people who should never do so (not on this thread). Posts above are good ones.

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Re: Why are REITs not providing any benefit in this market?

Post by jhfenton » Wed Jan 20, 2016 11:37 am

REITs are not doing well today, but they outperformed the major indices last year, and they do bob and weave a bit on a day-to-day basis compared to the other indexes. I'll happily keep my 5% stake in VGSLX and rebalance. (I've actually taken a touch off the top of my REIT position twice in the last 6 months because it was out-performing the rest of the portfolio.)

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Re: Why are REITs not providing any benefit in this market?

Post by White Coat Investor » Wed Jan 20, 2016 11:41 am

InvestorNewb wrote:REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
You think this is bad? You should have seen 2008. TSM down 50%, but REITS down 78%.
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Re: Why are REITs not providing any benefit in this market?

Post by lack_ey » Wed Jan 20, 2016 11:53 am

REITs suffered together and rebounded together with the broad stock market through 1972-1976. Both took a modest hit in 1990. There's of course some difference but aside from the tech bubble, no great divergence with things going very different ways. Expect high beta and moderately high correlation.

Out of 44 years since 1972, REITs and the stock market had the same sign 34 times, both being positive or both being negative. Of the 10 times they didn't, 5 were 1998-2002. One was 2007, where real estate started tanking earlier than the rest. And the performance difference was less than 10% in 3 of the remaining 4 times (twice less than 5%).

Lots of stock sectors have roughly this kind of correlation with the broad market. It's not just REITs.

So sometimes you'll get your different behavior and feel good about diversification... if it's different on the positive side. It's about just as likely to be diversification that drags you down. Most of the time it won't really feel like it's doing anything.

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Re: Why are REITs not providing any benefit in this market?

Post by alex_686 » Wed Jan 20, 2016 12:27 pm

lack_ey wrote:REITs suffered together and rebounded together with the broad stock market through 1972-1976. Both took a modest hit in 1990. There's of course some difference but aside from the tech bubble, no great divergence with things going very different ways. Expect high beta and moderately high correlation.

.....

Lots of stock sectors have roughly this kind of correlation with the broad market. It's not just REITs.
I would counter that if you looked at REITs and the S&P 500 since 1985 that the average 36 month rolling correlation has been about .4 and a beta of about .6. And while all sectors of the S&P 500 have drifting correlations and betas with the S&P 500 none have had such a persistent and different correlation and beta than REITS.

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Re: Why are REITs not providing any benefit in this market?

Post by telemark » Wed Jan 20, 2016 1:27 pm

Disclaimer: this may be the stupidest thing I have written on bogleheads.org, at least so far.*

I think of this as the Supreme Court of investing. You have the conservative wing, which would be bonds, and the liberal wing, which would be stocks. Often, but not always, they move in opposing directions. REIT is more like a swing vote, sometimes siding with one wing and sometimes with the other. But sometimes, when the situation is clear enough, they all vote the same way.

(*I did warn you)

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Re: Why are REITs not providing any benefit in this market?

Post by stratton » Wed Jan 20, 2016 1:47 pm

Year to date through Jan 19, 2016.

Vanguard small cap value etf (VBR): -10.56
Vanguard REIT index etf (VNQ): -4.72%
S&P 500 index: -7.96%

REITs didn't go down as much as some other stock.

Morningstar chart.

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Re: Why are REITs not providing any benefit in this market?

Post by nolapepper » Wed Jan 20, 2016 1:54 pm

I have 5% REIT in my IRA, not sure what to do. Bought at the peak. :(

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Re: Why are REITs not providing any benefit in this market?

Post by lack_ey » Wed Jan 20, 2016 1:57 pm

alex_686 wrote:
lack_ey wrote:REITs suffered together and rebounded together with the broad stock market through 1972-1976. Both took a modest hit in 1990. There's of course some difference but aside from the tech bubble, no great divergence with things going very different ways. Expect high beta and moderately high correlation.

.....

Lots of stock sectors have roughly this kind of correlation with the broad market. It's not just REITs.
I would counter that if you looked at REITs and the S&P 500 since 1985 that the average 36 month rolling correlation has been about .4 and a beta of about .6. And while all sectors of the S&P 500 have drifting correlations and betas with the S&P 500 none have had such a persistent and different correlation and beta than REITS.
Change the dates and the analysis and out pop different results.

Are energy and utilities that much closer to the market than REITs are? Of course something like industrials or consumer discretionary probably track a lot closer.

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Re: Why are REITs not providing any benefit in this market?

Post by GMan82 » Wed Jan 20, 2016 3:11 pm

nolapepper wrote:I have 5% REIT in my IRA, not sure what to do. Bought at the peak. :(
Yeah, I decided that I wanted 10% of my portfolio to be in REITs and so bought some in my Roth IRA just before everything started really dropping. Plus, I think I underestimated how much REIT already existed in VTI and VXUS and may have slightly overweighted with VNQ. Oh well. The Roth will be one of my smaller account by the time 2016 comes to a close. I figure what's done is done. I just won't direct any further contributions there and will let the market and my re-directed contributions re-balance the portfolio.

I manage my mom's taxable account though, which she started at the end of December. She isn't eligible for tax-sheltered accounts and wanted some Real Estate in her account. She has no contributions; this was just a lump sum investment. So in her account, I figure I'll just let the market re-balance it and if it continues to fall, may move some of total bond market into vgtsx and vtsax. Same deal. Let the market re-balance, and I may be able to avoid selling at a loss.

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Re: Why are REITs not providing any benefit in this market?

Post by Sbashore » Thu Jan 21, 2016 1:18 pm

nolapepper wrote:I have 5% REIT in my IRA, not sure what to do. Bought at the peak. :(
I know what I'm going to do with my 5% REIT. I'm going to hold it at 5%. Did I buy it at a peak? Have no idea. I've held it for so long, probably not, but what does it matter? It does what I want it to. It does not behave exactly like my other equity holdings, which is exactly why I hold it.
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Re: Why are REITs not providing any benefit in this market?

Post by swaption » Thu Jan 21, 2016 2:54 pm

Trying to see the diversification benefit in the current (or any) market is like looking at ocean waves and trying to figure whether the tide is rising or falling. Just stop staring at the waves!

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Re: Why are REITs not providing any benefit in this market?

Post by Rodc » Thu Jan 21, 2016 2:57 pm

EmergDoc wrote:
InvestorNewb wrote:REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
You think this is bad? You should have seen 2008. TSM down 50%, but REITS down 78%.
Right. That was an eye opener at the time (at least for me).

To the OP: nothing is guaranteed to zig when something else zags. That is correlation -1. Best one might do is correlation zero - say stocks and short term treasuries. In which case when stocks zig you have about a 50/50 chance of bonds zigging or zagging.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Why are REITs not providing any benefit in this market?

Post by patrick013 » Thu Jan 21, 2016 3:02 pm

The REIT's are just following the market...historical beta is about .8
age in bonds, buy-and-hold, 10 year business cycle

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Re: Why are REITs not providing any benefit in this market?

Post by White Coat Investor » Thu Jan 21, 2016 3:02 pm

nolapepper wrote:I have 5% REIT in my IRA, not sure what to do. Bought at the peak. :(
I also added REITs to my portfolio at the peak. In early 2007. However, my overall return in that asset class since adding it, as of Jan 1, annualizes to 10.09% per year. It's time in the market that counts, not timing the market.

What should you do? You added REITs for a reason. Go read what that reason is in your written investing policy statement. Has the reason changed? Almost surely not. So what should you do? Stay the course.

Seriously people, quit panicking. Most of the threads I've read on this forum this month consist of someone freaking out because their investments did what investments do. Go back and read some threads from 2008 when we all thought the world was going to hell in a handbasket. Yet here I am, 11 times richer than I was in 2008.

STAY THE COURSE!

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Re: Why are REITs not providing any benefit in this market?

Post by Fat-Tailed Contagion » Thu Jan 21, 2016 3:04 pm

It acts like a separate asset class so you never know.

What is its' correlation to interest rate movements ?
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Re: Why are REITs not providing any benefit in this market?

Post by lack_ey » Thu Jan 21, 2016 3:07 pm

Fat-Tailed Contagion wrote:It acts like a separate asset class so you never know.

What is its' correlation to interest rate movements ?
Virtually zero, despite the conventional wisdom.

Part of this might be that any particular effect is swamped out by the correlation to stocks and any particulars of the real estate market. I for example haven't seen an analysis that looks at correlation between interest rate movements and REIT performance delta relative to the stock market. I would do it myself if I tilted to REITs but I don't.

Larry Swedroe has an article on this, for example:
http://www.etf.com/sections/index-inves ... nopaging=1

(bond returns, interest rate movements... more or less the same thing)

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Re: Why are REITs not providing any benefit in this market?

Post by Bustoff » Thu Jan 21, 2016 3:58 pm

Here's a benefit.
VNQ current unadjusted effective yield is 3.89% as of 12/31/2015.

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Re: Why are REITs not providing any benefit in this market?

Post by Imbros » Thu Jan 21, 2016 4:14 pm

patrick013 wrote:The REIT's are just following the market...historical beta is about .8
OP, here is your short and straight forward answer.
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Re: Why are REITs not providing any benefit in this market?

Post by Rodc » Thu Jan 21, 2016 4:33 pm

Seriously people, quit panicking. Most of the threads I've read on this forum this month consist of someone freaking out because their investments did what investments do. Go back and read some threads from 2008 when we all thought the world was going to hell in a handbasket. Yet here I am, 11 times richer than I was in 2008.

STAY THE COURSE!

That's it, I'm going to Las Vegas to go climbing. Stock market risk pales in comparison to a high step onto a nubbin 20 feet above a #3 stopper.
This. Wish I could go with you! Have fun.
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Re: Why are REITs not providing any benefit in this market?

Post by randomguy » Thu Jan 21, 2016 5:21 pm

patrick013 wrote:The REIT's are just following the market...historical beta is about .8
What time period are you using? I have seen numbers closer to .5 but a lot depends on your time periods. The correlation in the 80s, 90s and early 00s was pretty low. Since the financial crisis it has been very high.

Uncorrelated assets (like bonds and stocks) don't zig when the other zags. They do their own thing. If you stocks are down, your bonds can go down also. Now there are some biases (governments try to cut interest rates to stimulate economies if there is a recession, the odds of bonds going up is well over 50%,..)

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Re: Why are REITs not providing any benefit in this market?

Post by patrick013 » Thu Jan 21, 2016 5:36 pm

randomguy wrote:
patrick013 wrote:The REIT's are just following the market...historical beta is about .8
What time period are you using? I have seen numbers closer to .5 but a lot depends on your time periods. The correlation in the 80s, 90s and early 00s was pretty low. Since the financial crisis it has been very high.

Uncorrelated assets (like bonds and stocks) don't zig when the other zags. They do their own thing. If you stocks are down, your bonds can go down also. Now there are some biases (governments try to cut interest rates to stimulate economies if there is a recession, the odds of bonds going up is well over 50%,..)
Well on Google Finance it says .8 (.78). Perhaps Portfolio Visualizer
would have a better number for different periods. But it sure is
behaving like it has a somewhat high beta. It's a stock. I'm getting
a hefty loss on my hypothetical portfolio since Jan 8.

Corp. bonds are down and Govt. bonds are up in price but their historical
betas are very low, according to Google finance of course.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Why are REITs not providing any benefit in this market?

Post by Kosmo » Thu Jan 21, 2016 5:43 pm

InvestorNewb wrote:REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
The short short answer, which I'm sure has already been stated or at least implied, is that you are confusing low correlation with negative correlation. The benefit of diversification is when asset classes move independently of each other, not necessarily in opposite directions.

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Re: Why are REITs not providing any benefit in this market?

Post by NOVACPA » Thu Jan 21, 2016 6:21 pm

Last week new REITs were banned from accessing FHLB funding. A 5 year sunset provision is in place for current REITS members.

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Re: Why are REITs not providing any benefit in this market?

Post by patrick013 » Thu Jan 21, 2016 6:42 pm

NOVACPA wrote:Last week new REITs were banned from accessing FHLB funding. A 5 year sunset provision is in place for current REITS members.
Is that a smoke signal for a housing/mortgage/real estate downward correction.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Why are REITs not providing any benefit in this market?

Post by surfstar » Thu Jan 21, 2016 6:47 pm

EmergDoc wrote:That's it, I'm going to Las Vegas to go climbing. Stock market risk pales in comparison to a high step onto a nubbin 20 feet above a #3 stopper.
Hope the rock is dry enough for ya! (seriously, please don't climb on wet sandstone)

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Re: Why are REITs not providing any benefit in this market?

Post by abuss368 » Thu Jan 21, 2016 7:38 pm

Bogleheads,

We have invested in REITs for many years and will stay the course. The Vanguard U.S. and International REIT funds have worked well.

Best.
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Re: Why are REITs not providing any benefit in this market?

Post by HomerJ » Thu Jan 21, 2016 7:49 pm

rmelvey wrote:I think the idea that they are different comes from the fact that they didn't participate in the tech bubble and the subsequent crash.
Ah, backtesting... You mean the past doesn't always repeat?

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Re: Why are REITs not providing any benefit in this market?

Post by nedsaid » Fri Jan 22, 2016 1:18 am

InvestorNewb wrote:REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
Hard to say. Every bear market is different. REITs worked brilliantly in the 2000-2002 bear market but not in 2008-2009 and apparently not now. Asset allocation is not an exact science and this is why the carefully constructed efficient frontiers never quite seem to work. There just is no exactly right asset mix that is guaranteed to optimize bear market protection. As I have said many times, asset classes can act in ways that investors don't expect.
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Re: Why are REITs not providing any benefit in this market?

Post by Valuethinker » Fri Jan 22, 2016 5:15 am

nedsaid wrote:
InvestorNewb wrote:REITs are supposed to zig when the market zags.. or so I have been told.

Why are we not seeing the diversification benefit in the current market?
Hard to say. Every bear market is different. REITs worked brilliantly in the 2000-2002 bear market but not in 2008-2009 and apparently not now. Asset allocation is not an exact science and this is why the carefully constructed efficient frontiers never quite seem to work. There just is no exactly right asset mix that is guaranteed to optimize bear market protection. As I have said many times, asset classes can act in ways that investors don't expect.
One way to look at REITs 1998-2003 say is that they went into that period very undervalued. Like a lot of value stocks, the Tech Media Telecomms bubble left them in the dust (CISCO at 50.0x PE, GE at 35.0x PE). The bear market was those stocks collapsing rather than a general market rout.
Vodafone was over 15% of the UK stock market at one point.

By contrast REITs do not, now, look undervalued. If we look at, mathematically, the reasons for the performance of a stock:

- the valuation basis can change (higher PE or lower D/P ie yield) - I think it's fair to say that is unlikely with current REIT index

- the current dividend yield ie cash flow to investors - again, just below 4%

- future dividend growth which could exceed expectations

Right now REITs are in a push-pull situation. The push was falling interest rates, making the current yield more attractive. That cycle has probably ended for the moment-- the Fed is more likely to tighten monetary policy than loosen it, from here (zero interest rate lower bound).

The pull is economic growth leading to higher occupancy and higher rents. That is ongoing, and is a distinct positive for REITs. REITs are probably most correlated with US employment, which has been steadily rising for a long time. I don't know to what extent there has been overbuilding, a classic sign of the top of a RE market, supply getting ahead of demand, but conversely in 2008-2011 virtually nothing got built, so there is a deficit of supply to be made up.

Therefore I conclude that all things being equal, REITs are not likely to crash again (unless there is a financial crash of some sort of sub Lehman scale-- remember when Bank of New England went bust? And NE real estate was then under water for about 8 years?). And they are likely, in a zero inflation environment, to show some modest growth in rental income and thus dividends. They may buyback shares to improve their share prices/ reduce discounts to NAV.

So my outlook for REITs is kind of "enhhhh...." neither red hot nor ice cold.

As interest sensitives they will not react well in the short term to either Fed tightening on a liquidity squeeze in markets (which is an effective increase in interest rates-- even if the LIBOR doesn't move, people have trouble getting money).

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Re: Why are REITs not providing any benefit in this market?

Post by columbia » Fri Jan 22, 2016 10:51 pm

Investment instruments have a habit of not doing what you want/expect them to do.

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Re: Why are REITs not providing any benefit in this market?

Post by NOVACPA » Fri Jan 22, 2016 11:15 pm

patrick013 wrote:
NOVACPA wrote:Last week new REITs were banned from accessing FHLB funding. A 5 year sunset provision is in place for current REITS members.
Is that a smoke signal for a housing/mortgage/real estate downward correction.
I don't think it is a smoke signal. It's likely just noise. It will ruin a few, but if access to subsidized financing was the business plan, then the business plan was flawed from the beginning.
Final Rule Banning Captive Insurers From FHLBank System Called ‘Disappointing’

Despite receiving hundreds of comments against the proposed rule to ban captive insurance companies from membership in the Federal Home Loan Bank system, the Federal Housing Finance Agency forged ahead this week and issued a final rule banning them from the FHLBanks, upsetting many in the mortgage industry. The decision forces FHLBank members that had used their captive insurers to join the system prior to the FHFA’s proposed rule, many of which are ...

http://www.insidemortgagefinance.com/is ... 151-1.html

The final rule issued last week banning captive insurance companies from joining the Federal Home Loan Banks ruffled feathers in the mortgage industry and has some pointing to Congress for future guidance on the issue. FHLBank members that joined the system by way of their captive insurers before the Federal Housing Finance Agency’s proposed rule issued in September 2014 have five years to relinquish their membership. Many are real estate investment trusts that would otherwise be ineligible for membership if it weren’t for finding a loophole in the system. Captive insurance members that obtained membership after the FHFA announced the proposed rule have a year to exit the system and unwind their advances.

http://www.insidemortgagefinance.com/is ... 254-1.html

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White Coat Investor
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Re: Why are REITs not providing any benefit in this market?

Post by White Coat Investor » Sat Jan 23, 2016 2:29 am

surfstar wrote:
EmergDoc wrote:That's it, I'm going to Las Vegas to go climbing. Stock market risk pales in comparison to a high step onto a nubbin 20 feet above a #3 stopper.
Hope the rock is dry enough for ya! (seriously, please don't climb on wet sandstone)

http://forecast.weather.gov/MapClick.ph ... qFtuCTTmzk
Quite dry today. I don't think it has rained for days, has it? No evidence of it.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Why are REITs not providing any benefit in this market?

Post by surfstar » Sat Jan 23, 2016 11:39 am

EmergDoc wrote:
surfstar wrote:
EmergDoc wrote:That's it, I'm going to Las Vegas to go climbing. Stock market risk pales in comparison to a high step onto a nubbin 20 feet above a #3 stopper.
Hope the rock is dry enough for ya! (seriously, please don't climb on wet sandstone)

http://forecast.weather.gov/MapClick.ph ... qFtuCTTmzk
Quite dry today. I don't think it has rained for days, has it? No evidence of it.
Yeah, enjoy! I think we've had more rain in CA, actually this week.

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Re: Why are REITs not providing any benefit in this market?

Post by lack_ey » Sat Jan 23, 2016 11:44 am

Valuethinker wrote:By contrast REITs do not, now, look undervalued. If we look at, mathematically, the reasons for the performance of a stock:

- the valuation basis can change (higher PE or lower D/P ie yield) - I think it's fair to say that is unlikely with current REIT index

- the current dividend yield ie cash flow to investors - again, just below 4%

- future dividend growth which could exceed expectations
For REITs do you really count the return of capital and capital gains part from a REIT fund as part of the dividend yield?

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Re: Why are REITs not providing any benefit in this market?

Post by Johno » Sat Jan 23, 2016 2:43 pm

alex_686 wrote:
nisiprius wrote:What "benefit" did REITS provide in 2008-2009? Total Stock fell 52% (i.e. lost about half of its value) while VGSIX fell 63% (i.e. lost about two-thirds of its value).
Nisiprius, you have your logic backwards. The question you want to ask is "What benefit did stocks provided in 2008?".

In 2008 crisis was triggered by the real-estate bubble popping. This had obvious effects on REITS, but what effects would a real estate crash have on the stock market? In this case it had a big impact. However this does not always happen.

A better question is how well REITs react to the stock bubble crashing. I will point out that REITS did pretty good during the 2001 dot.com crash.
I don't think logic backward exactly, it's something that happened, REIT's crashing worse than S&P in 2008-9. However I look for consistency in the view of 2008-9, and don't always see it. It seems the same people who harp on 2008-9 in pointing to REIT's and some other less than 100% correlated risk assets will tend to dismiss for example asset allocation methods other than strict %'s (trend following, vol based) which did especially well in 2008-9. In one case 2008-9 is the 'ah hah!' smoking gun, in the other 2008-9 becomes a fluke of little relevance. One might almost suspect it's confirmation bias of preconceptions.

But in particular case of REIT's we can take a fundamental view. The 2008-9 crisis did originate in real estate assets, but not those of typical REIT's. The issue was really more I believe the fear of 'no financing at any price' which came after the crisis reached the point of bringing down major financial institutions: REIT's are typically more levered entities than public stock companies on average. It would seem that element could recur in future 'debt centric' crises which don't start in housing, though you wouldn't expect it in purer (in hindsight) stock bubble bursts.

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Re: Why are REITs not providing any benefit in this market?

Post by Valuethinker » Sun Jan 24, 2016 5:54 am

Johno wrote:
alex_686 wrote:
nisiprius wrote:What "benefit" did REITS provide in 2008-2009? Total Stock fell 52% (i.e. lost about half of its value) while VGSIX fell 63% (i.e. lost about two-thirds of its value).
Nisiprius, you have your logic backwards. The question you want to ask is "What benefit did stocks provided in 2008?".

In 2008 crisis was triggered by the real-estate bubble popping. This had obvious effects on REITS, but what effects would a real estate crash have on the stock market? In this case it had a big impact. However this does not always happen.

A better question is how well REITs react to the stock bubble crashing. I will point out that REITS did pretty good during the 2001 dot.com crash.
I don't think logic backward exactly, it's something that happened, REIT's crashing worse than S&P in 2008-9. However I look for consistency in the view of 2008-9, and don't always see it. It seems the same people who harp on 2008-9 in pointing to REIT's and some other less than 100% correlated risk assets will tend to dismiss for example asset allocation methods other than strict %'s (trend following, vol based) which did especially well in 2008-9. In one case 2008-9 is the 'ah hah!' smoking gun, in the other 2008-9 becomes a fluke of little relevance. One might almost suspect it's confirmation bias of preconceptions.

But in particular case of REIT's we can take a fundamental view. The 2008-9 crisis did originate in real estate assets, but not those of typical REIT's. The issue was really more I believe the fear of 'no financing at any price' which came after the crisis reached the point of bringing down major financial institutions: REIT's are typically more levered entities than public stock companies on average. It would seem that element could recur in future 'debt centric' crises which don't start in housing, though you wouldn't expect it in purer (in hindsight) stock bubble bursts.
All good stuff.

One would add that REITs are coupled to the real economy. The economic downturn led to a drop in demand for most types of commercial space (even apartment REITs took pain as people moved out, moved in with their parents, etc.). So the market rationally anticipated that.

If we look at the UK the main problem was yields (cap rates) got too low (below 4% for prime London) and there was a valuation correction and the subsequent impact of gearing (if you borrowed £500m to finance a building valued at 600m, and it drops in value to 300m then when the loan comes due in 5-10 years you have wiped out the equity). That's what you are pointing to.

But if we look at industrial, retail space and non London office space, the drop in consumer spending and employment has a big impact. Yields on some types of commercial property are still over 10%, having peaked at maybe 13% (some types of property now seem unlettable- that's structural change eg the shift of shopping online).

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