The REZ Paradox

I had a brief exchange with Andrew Butter on Seeking Alpha that I thought might warrant a broader audience here.

Specifically, Andrew asked about the FTSE NAREIT Residential Plus Capped Index Fund (REZ) and wondered if apartments were behind the relative outperformance of this real estate ETF.
My reply noted that the three largest components of REZ are:

1. Apartments – 47%
2. Health care – 37%
3. Self storage – 13%

It comes as no surprise to anyone that recent economic forces have driven a number of strong housing market trends, including a decrease in home ownership and an increase in the demand for apartments. A story by Dawn Wotapka of the Wall Street Journal yesterday confirmed that the apartment market continues to rally.

Of course, as homeowners migrate to apartments, they are typically downsizing in terms of square feet of living space, which is also increasing the demand for self-storage facilities. When you add together the 47% of REZ that is accounted for by apartments and 13% that is attributed to self storage, the result of the move from homes to apartments is a paradox of sorts in which the REZ ETF as currently structured should perform particularly well in a deteriorating residential real estate market.

Seen in this light, there is little wonder that REZ has outperformed its counterparts, RTL and FIO, which are focused primarily on shopping centers and offices, respectively.

Finally, on a housekeeping note, I am making a concerted effort to keep up with my Seeking Alpha private mailbox and comments, just as I do with private emails and comments on the blog. At the moment I am a little behind, but if you have some outstanding questions and comments, I expect to get caught up in the next day or two.

Related posts:

• Commercial Real Estate Sub-Sector Breakout
• Updating the Commercial Real Estate Picture
• The Looming Commercial Real Estate Crisis
• Commercial Real Estate Blogs
• Three Commercial Real Estate Sub-Sector ETFs to Watch
• Moodys/REAL Commercial Property Price Index
• Commercial Real Estate Problems Piling Up

Disclosure(s): none

Commercial Real Estate Sub-Sector Breakout

Back in April 2009 in Commercial Real Estate Sub-Sectors ETF to Watch, I highlighted three commercial real estate sub-sector REIT ETFs, discussed their composition and included a performance graph going back to the date of the Lehman Brothers bankruptcy, September 15, 2008. The three REIT ETFs are:

• FTSE NAREIT Retail Capped Index Fund (RTL) – emphasis on shopping centers (46%) and regional malls (43%)
• FTSE NAREIT Industrial/Office Capped Index Fund (FIO) – mostly office (66%), but some (21%) industrial
• FTSE NAREIT Residential Plus Capped Index Fund (REZ) – apartments (47%) dominate, but with a healthy dose (37%) of health care

I have updated the performance of each of these real estate sectors in the chart below, which reflects all dividends and also begins from the date of the Lehman Brothers bankruptcy filing. This time around, instead of updating the StockCharts.com graphic, I have elected to use an ETFreplay.com chart, as it adds some numbers to the chart, notably total return statistics as well as historical volatility and drawdown data.

Note that the residential real estate ETF, REZ, has rallied to where it is currently trading 8.1% above its pre-Lehman level and comfortably above the April 2010 high. On the other hand, the highly correlated industrial/office real estate ETF (FIO) and retail real estate ETF (RTL) are still both more than 15% below their pre-Lehman levels and are struggling to move above their April 2010 highs.

Real estate is a multi-dimensional beast and these three sub-sector ETFs can assist investors in understanding which parts of the real estate market are showing relative strength and which are demonstrating relative weakness.

Related posts:

• Updating the Commercial Real Estate Picture
• The Looming Commercial Real Estate Crisis
• Commercial Real Estate Blogs
• Three Commercial Real Estate Sub-Sector ETFs to Watch
• Moodys/REAL Commercial Property Price Index
• Commercial Real Estate Problems Piling Up
  

[source: ETFreplay.com]

Disclosure(s): none

Real Estate Breaks Out While the Major Indices Pause

A wave of buying in the last ten minutes pushed the major indices to small gains today, following a day of lackluster trading. Stocks caught a bid early in the session following the announcement of a 3.6% increase in pending home sales for the month of June. While the broad indices bounced around near the unchanged mark all day, real estate was strong throughout the day, with IYR, the popular real estate ETF, gaining 4.8% on the day.

The chart below shows today’s action constituted a breakout for IYR, which is now trading at levels not seen since early November. Today’s volume of on volume of 40 million shares was also the highest in more than two months.

Three subsector real estate ETFs posted even more impressive gains than IYR. The FTSE NAREIT Retail Capped Index Fund (RTL) gained 6.0%, while the FTSE NAREIT Industrial/Office Capped Index Fund (FIO) advanced 5.5% and the FTSE NAREIT Residential Plus Capped Index Fund (REZ) added 4.9%. For more on the holdings of these three ETFs, check out Three Commercial Real Estate Sub-Sectors to Watch.

[source: StockCharts]

Three Commercial Real Estate Sub-Sector ETFs to Watch

I plead guilty to treating commercial real estate as a single homogeneous entity in my two previous commercial real estate posts, Commercial Real Estate Problems Piling Up and Moodys/REAL Commercial Property Price Index.

The truth is that while there are a wide variety of REITs out there that span the full range of commercial real estate activity, my focus is mainly on ETFs and when it comes to ETFs, most of the popular real estate ETFs are of the large catchall variety, such as IYR, ICF, VNQ and RWR.

While I am not aware of any ETFs that are pure plays on shopping center REITs, office REITs or apartment REITs, there are three commercial real estate sub-sector REIT ETFs that can help sort through various sectoral trends within the REIT universe. The three sub-sector ETFs, with their allocations as of April 28^th are as follows:

FTSE NAREIT Retail Capped Index Fund (RTL)

• 52.28% Equity Shopping Centers
• 35.85% Equity Regional Malls
• 11.47% Equity Free Standing
• 0.20% Short-Term Securities
  

FTSE NAREIT Industrial/Office Capped Index Fund (FIO)

• 54.87% Equity Office
• 26.92% Equity Industrial
• 17.93% Equity Mixed
  

FTSE NAREIT Residential Plus Capped Index Fund (REZ)

• 41.98% Equity Apartments
• 39.02% Equity Health Care
• 15.35% Equity Self Storage
• 3.37% Equity Manufactured Homes
• 0.07% Short-Term Securities
  

For the record, the limited liquidity for RTL and FIO makes them better indicators than trading vehicles, but REZ is actively traded.

As the chart below shows, the retail and industrial/office REIT ETFs have moved almost in lockstep in the post-Lehman world, while the residential ETF fared better in the downturn, but has been a little more sluggish during the bounce off of the March bottom.

[source: StockCharts.com]