Will The Recent Pullback In REITs Provide A Buying Opportunity?

Over the course of the last thirty years, REITs have outperformed the S&P 500 Index.

Source: Chart of the Day

According to recent commentary from Chart of the Day, "...the current correction in REITs is comparable to that of the more dramatic corrections of the past 35 years." Does the recent correction in REITs provide an investment opportunity?

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There are a number of risks with real estate investments though. Some of the retail mall REITs and industrial REITs could remain under pressure if consumer spending remains constrained and the economy remains in a slow growth mode. The National Association of Real Estate Investment Trusts (NAREIT) site maintains comprehensive quarterly data on REITS. Below is some chart data from the April 2008 report (PDF).

The YOY dividend growth rate has remained in the mid single digits.

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The REIT dividend payout as a percentage of funds from operations does remain below the longer term average payout of 73.75%.

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And finally, if there is one event that could derail or delay a potential recovery, it is tighter bank lending standards. As the below chart notes, bank's have indeed tightened their lending.

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In the end opportunities may be uncovered in some REIT investments that have lower levels of leverage, stronger FFOs and operate in stronger real estate segments.

Source:
NAREIT Chart Book (PDF)
National Association of Real Estate Investment Trust
April 2008
http://www.nareit.com/library/performance/CB0804.pdf