Real Estate Market

Real estate investors find shelter in apartment REITs

(12/2/2011) Erate Exclusive - Does the slow-growth economy's lackluster housing sector make you reluctant to add residential properties to your investment portfolio?

Consider an apartment real estate investment trust (REIT).

Apartment REITs are hot and running with the Wall Street bulls.

REITs are largely publicly-, but also privately-traded companies that invest in and manage income-producing real estate property, in this case, multifamily housing properties and apartment complexes.

(Other forms of REITs, by the way, include retail, health care, office and mortgage REITS as well as combinations of those sectors.)

Investors typically purchase REITs in the form of a managed investment, say, as mutual funds comprised of bundled REITs.

REITs are highly liquid and provide a return in the form of increased share values, but investors also like them because REITs provide an income stream in the form of dividends. Even if shares aren't increasing in values, dividends can continue to pay out.

Apartment REITs are doing well because the rental market is booming.

The National Multifamily Housing Council (NMHC) says in it's Quarterly Survey of Apartment Market Conditions for the third quarter 2011, 67 percent of industry executives noted considerable activity, either in the building planning stage or actual new construction.

Investor and builder demand for new rental properties is up because the owner-occupied housing sector's slump is forcing more people to rent, rather than buy.

Recently, RealFacts announced the rental market had returned to pre-recession territory with average rents, at $994 a month, on par with the average $997 a month when the market peaked back in the third quarter of 2008.

Likewise, the average occupancy rate, at 93.4 percent for the third quarter this year, was as high as its ever been. It was only 92.6 percent during the last peak in the third quarter 2008.

CoreLogic's recent U.S. Housing and Mortgage Trends Report revealed the share of income that goes toward housing is growing faster among renters compared to homeowners, as the demand allows landlords to ask for higher rents.

Since 1985, homeowners have increased their housing expenditure allocation by 12 percent, while renters increased by 22 percent. As of 2010, homeowners spent 33.2 percent of their expenditures on housing, up from 31.9 percent in 2005. Renters spent 38.4 percent of their expenditures on housing, up from 35.6 percent in 2005, CoreLogic reported.

The apartment REIT industry sector expects the 2011 bounty to spill over into 2012 as the housing market continues to slumber, weighed down by foreclosures already on the books, a greater number of foreclosures yet to come, and other factors.

"Powerful demographic trends along with changing attitudes about homeownership and tighter mortgage underwriting continue to drive a shift toward renting, which is fueling a ramp up in new construction," said NMHC Chief Economist Mark Obrinsky.

Keefe, Bruyette & Woods (KBW) an investment bank that specializes in REITS and other financial services recently told the National Association of Real Estate Investment Trusts (NAREIT) apartment REITs are also strong because of population growth in the 20-to-34 year old, "echo boomer" group.

Haendel St. Juste, an analyst with KBW, said landlords will continue to have pricing power and push rents ever higher because echo boomers with bachelor's degrees are less affected by the jobs downturn.

So which apartment REITs are hot?

Financial News Network (FNN) recently named residential REITs with the highest year-over-year expected earnings per share (EPS) growth rates:

• Equity Residential - EPS growth of 180 percent, trading in the range of $48 to about $64 a share.

• Camden Property Trust - EPS growth of 125 percent, trading between $55 and an average consensus analyst price target of nearly $65.

• BRE Properties - WIth an EPS growth of 98.3 percent, BRE often outperforms the Dow and the S&P 500.

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