The Real Deal New York

For real estate companies, ETFs appear A-OK

March 10, 2011 11:17AM
By C. J. Hughes

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From left: Matthew McCall of Penn Financial Group and Appel Asset Management CEO Marvin Appel

The landlords of Manhattan’s office buildings may look at darkened cubicles and worry that a full recovery is a long ways off.

But the ones who are public companies could still take comfort from the performance of their stock, especially if those shares are bought and sold in exchange-traded funds, or ETFs.

Those types of funds, which are made up of real estate investment trusts, or REITs, have been gangbusters.

In the 12-month period ending in January, the prices of the 17 real-estate-themed ETFs posted an average total return of 46 percent, according to Loren Fox, an analyst with Strategic Insight, a Manhattan-based research group.

That’s more than double the performance of the S&P 500, a measure of blue-chip stocks, which posted an average total return of 22 percent over the same period, Fox said.

“The category has certainly put up impressive performance,” even if these types of products, which constitute a market cap of $16 billion, aren’t as popular with a broad swath of investors as they could be, Fox said.

Yet, “I expect it will be a hotter category as people digest the performance numbers,” as they continue to rack up gains, he added.

Only about a dozen REITs and the properties behind them are located in New York or have significant holdings here, but every New York-associated REIT does have at least some exposure in the 17 ETF offerings.

For instance, if an investor buys into iShares FTSE NAREIT Industrial/Office Capped Index Fund, which is offered by BlackRock, about 16 percent of his investment will be with Boston Properties, and about 7 percent with SL Green, which both have significant holdings in New York City.

That fund is faring well — investors would have also walked away with about a 20 percent return if they bought in 2009, according to data provided by Morningstar, the Chicago research firm. Those gains suggest that investors have strong faith in those landlords to fill their floors and get top rents, analysts said.

ETFs are relatively new. The first one was created in 1993, by Boston-based State Street Global Advisors, the wealth manager, though for years they never really caught on with typical investors; instead, they were used mostly for highly technical investing strategies. Like mutual funds, they pool money, but unlike them, they can trade throughout the day, so their returns are often better, analysts said.

The first real estate ETF — the Vanguard REIT Index ETF, which is the largest, with a value of $8.5 billion — came much later, in 2004. Most were created in 2007, by BlackRock, during the boom. They trade on 11 indices today.

Some see upsides in them through 2011, like Matthew McCall, president of Penn Financial Group, an advisory firm which often recommends them to clients.

Indeed, the CEOs of many of those real estate companies have not yet taken advantage of their stock’s robust prices to roll out a secondary offering, which are usually a sure-fire way of drumming up capital. That suggests those leaders think values will still climb, McCall explained. They “believe there are higher prices there,” he said.

Yet others are more bearish. “Real estate [ETFs] would not be my first choice,” as they seem relatively overpriced, said Tim Strauts, a Morningstar analyst who studies ETFs of all types.

In fact, because they are a leading indicator of what happens in the real world, they might already be factoring in conditions months hence, he said. But, “if you wait for the good news to happen, you probably missed the big returns,” Strauts said.

Similarly, Marvin Appel, chief executive of Appel Asset Management of Great Neck, N.Y., doesn’t encourage them for his clients, as the companies underlying them may be overvalued. Vornado’s stock, for example, was paying dividends of 7 percent for years but now is just 3 percent, he said. “I wouldn’t advise people to sock away money in them at these prices,” Appel said.

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