Rise in short interest creates caution among REIT investors

The prospect of a deflated real estate market is constantly looming, but some private and institutional investors may be taking moves to protect themselves from a down market.

Market insiders such as Steven Roth, chairman and CEO of Vornado Realty Trust, are selling their shares in real estate investment trusts, also known as REITs, and the number of overall short sellers in the real estate sector has increased.
That means bets against the real estate market are growing.

“There are always short sellers in the market, so that’s nothing new,” said Bruce Schonbraun, a principal at Schonbraun Safris McCann Bekritsky & Co., a real estate advisory firm. “It’s just the amount of short sellers has increased.”

When an investor sells short, they borrow the shares from a broker and later resell them at the current market price, betting the price of the stock will decline. Then the investor will buy the shares back, return them to the broker and keep the difference.

However, the increase in short sellers may be less of a response to current market conditions than to the dramatic increase in the value and volume of publicly listed securities over the past three years, Schonbraun said.

Barry Vinocur, editor and publisher of Realty Stock Review, agreed that the real estate market’s fundamentals are strong, though REITs had a weak fi rst quarter. But he recommended that private investors, rather than shorting individual REITs, look at real estate exchange-traded funds, which trade a basket of real estate related stocks or pool a group of publicly traded REITs, which function somewhat like mutual funds, but are concentrated within the industry.

“There are four out there,” he said. “And there also are a number of other exchange-traded funds that aren’t specifically real estate, but have a high real estate component in them that are sometimes used by the pros who are looking for more liquidity.”

Some market watchers are predicting a decline of about 10 percent in real estate prices when interest rates hit between 7.25 percent to 7.5 percent, said Doug Heddings, a broker with Prudential Douglas Elliman.

If prices decline, “that may be a point when investors jump in,” Heddings said, which will in turn drive up prices again, similar to what occurred after the terrorist attacks of Sept. 11, 2001.

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“Much like now, all these people were sitting on the sidelines with cash, and as soon as they jumped into the market, they drove up demand again,” Heddings said.

As companies wait for what some consider to be an inevitable market correction, they are better prepared than ever to withstand it, Schonbraun said.

“There are two ways to buy real estate,” he said. “One is to buy an asset, and the other is to look at the debt side of the equation.”

“Real estate companies now have the kinds of management teams that can look at both sides of the equation and protect their flank that way,” he said.

The formula for success in a down market remains the same, Schonbraun said.

“The successful companies are not overleveraged, they have a healthy balance sheet, and they have a lot of what we call ‘dry gunpowder,'” he said. “That’s the ability to go out and buy more stuff.”

Still, REITs including Vornado, Boston Properties and SL Green saw a large number of insider sales in the last three months of 2004, the Wall Street Journal reported earlier this year.

In January, Roth sold 150,000 Vornado shares worth about $11 million. It was the fi rst time he has sold his own shares since 1993.

Marc Holliday, the CEO of SL Green, sold 150,000 shares worth $11.1 million toward the end of 2004, and Edward Linde, CEO of Boston Properties, sold 444,900 shares worth more than $26.4 million, according to Thomson Financial.

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