REITs took devastating early hit, but finished on upswing

Like the proverbial canary in the coal mine, assets of the largest managers of real estate investment trusts were first to feel the shock wave of volatile world markets.

According to sister publication Pensions & Investments’ survey of the largest real estate money managers, total REIT assets fell 44%, to $128.9 billion, while U.S. institutional tax-exempt assets invested in REITs fell by 36%, to $44.1 billion, for the 12-month period ended June 30. The return of the FTSE NAREIT Composite Index was -43.3% for the period.

Performance of the top REIT managers is all over the map. For example, Barclays Global Investors retained the top spot on the list ranked by total REIT assets, even though such assets there dropped 27%, to $19.4 billion, while its U.S. institutional tax-exempt REIT assets fell 33%, to $7.6 billion. Cohen & Steers moved down a notch to third, with total assets falling 43% and institutional assets down just 6%.

“From our perspective, the decline in assets is 100% attributable to the REIT market,” said Marco Merz, an investment strategist with BGI.

Shaping the results was a spectacular comeback in the REIT index, which gained 51% from the market bottom on March 6, through June 30, noted Brad Case, vice president for research and industry information at the National Association of Real Estate Investment Trusts, a trade organization.

“The fall of last year was not ordinary. There was a liquidity crisis that hit REITs in November through February,” Mr. Case said. During the liquidity crisis, investors were betting more on the likelihood that the REIT would default on debt than on the value of the property, he said.

Since the selloff in March, there has been a massive rebound, with defined-benefit plans and defined-contribution plans adding REITs to get international-real-estate exposure and a hedge against inflation, Mr. Merz said. For example, in the first half of this year, one DC client added an international-REIT investment option. Mr. Merz declined to name the fund sponsor.

“The crisis ended for REITs when REITs started issuing equity,” he said. In the second quarter, REITs raised $15.7 million in 51 public offerings, up from 11 offerings that raised $3.1 million in the first quarter, and 10 offerings that raised $1.1 million in the fourth quarter of 2008, according to NAREIT data.

Assets of REIT managers dropped faster than privately held real estate because the crisis was reflected immediately in the stock market, whereas real estate valuations lag.

“REITs were the first to absorb the deflation in value,” said Gary Koster, Americas leader for real estate fund services at Ernst & Young LLP. “REITs had a terrible year. REITs were first into the downturn and now they are roaring back.”

REITs were down in October and November, and continued to fall through March, said Bruce Eidelson, director of real estate securities for Russell Investments. Russell’s total REIT assets dropped 17%, and its institutional assets fell by 34% during the survey period.

However, REITs are not a perfect preview of what to expect in the future from privately held real estate.

“REITs have more of the character of equities than pure-play real estate,” Mr. Koster said. “There is more volatility in REIT holdings, and it is more closely tied to the broader equity markets than pure property investments.”

Arleen Jacobius is a reporter for sister publication Pensions & Investments.