Shares of REITs, Builders Take Hits

Real estate stocks are being battered by escalating fears that the run-up in property values is about to end, or even reverse.

Shares of real estate investment trusts and home builders fell sharply Monday, adding to steep losses racked up last week, as rising interest rates have deepened concerns that the nation’s property boom may be reaching its peak, analysts say.

A Bloomberg News index of 147 real estate investment trust stocks slumped 3.6% on Monday, and now is down 8.9% from its record high reached a week ago. Real estate investment trusts, or REITs, are companies that own portfolios of commercial properties, such as office towers and shopping malls.

Among home builders, shares of Westwood-based KB Home Corp. have fallen nearly 14% over seven sessions, including a drop of $2.05, or 2.8%, to $72.45 on Monday.

Many property-related stocks reached all-time highs in recent weeks even as upbeat news on the economy pushed up long-term interest rates, including mortgage rates. But by late last week the trend in rates began to rattle some investors.

The obvious concern is that higher borrowing costs could make property less affordable. In the case of REITs, another issue is that many investors buy the shares for the dividends they pay, and those dividend returns become less competitive with bond yields as interest rates move up.

Canyon Capital Realty Advisors, a Beverly Hills-based real estate investor, can’t find any bargains at the moment and is selling REIT stocks in its hedge fund, said Managing Partner Bobby Turner.

“We look for undervalued REITs, and none particularly are at the moment,” Turner said. “If you’re not willing to buy more at these prices, you should be selling.”

Some investors say that, even without rising interest rates, property stocks were primed for profit taking given their hefty gains this year while the chatter about a U.S. real estate bubble has grown ever louder.

“REITs just got too high,” said Sam Lieber, manager of the Alpine U.S. Equity Real Estate fund, a Purchase, N.Y.-based mutual fund. “The stocks have overshot.”

At its record high last week, the Bloomberg REIT index was up 11.9% year to date, after soaring 28.1% in 2003 and 24.8% in 2004.

On Monday, a Barron’s magazine cover story helped to fuel selling in REIT shares by suggesting they could be in a bubble of their own, inflated by the rise in commercial property values.

Among the REIT shares hit hard on Monday were Vornado Realty, down $2.52 to $82.87; CenterPoint Properties, off $2.04 to $38.72; Simon Property Group, which slid $3.36 to $72.60; and Macerich Co., down $3.40 to $62.35.

Real estate bulls say there are few, if any, convincing signs that property prices are cracking, either in the commercial or residential sectors.

But some investors say a key issue for the U.S. commercial property market is that high prices -- driven in part by a rush of foreign money into the American market in recent years -- are limiting the future growth potential of REITs.

Many REITs are taking advantage of the strong demand for commercial properties such as office buildings by selling some of their holdings, said Stan Ross, chairman of the USC Lusk Center for Real Estate.

Those profits will show up as dividends for investors in the short term, but the sales raise the question of how REITs will replace the income from those properties and keep growing if they have to reinvest in a seller’s market, Ross said.

Lieber said he was more concerned about REITs than about home builders.

The builders have a healthy long-term outlook because of demographic trends and because consolidation in the industry is giving the bigger players more leverage over the market, Lieber said. What’s more, interest rates are rising because the economy is healthy, which should translate into more jobs and greater buying power for consumers, he said.

Nonetheless, some investors have been bailing out of builders’ stocks. Shares of Dallas-based Centex Corp. hit a record closing high of $79.50 on July 20. On Monday the shares fell $1.67 to $68.79, bringing the decline from the peak to 13.5%.

Toll Bros., a Horsham, Pa.-based home builder, dropped $2.19 to $48.76 on Monday. The stock has fallen 16.3% from its all-time high of $58.25 on July 20.

By contrast, the blue-chip Standard & Poor’s 500 stock index has slipped just 1.8% from its four-year high reached last week.

REIT and builder shares have suffered sharp pullbacks several times in recent years, only to resume their bull markets.

The Bloomberg REIT index dived 18.5% between April 1 and May 10 of 2004, a time of surging long-term interest rates. It then rocketed 36% between May 11 and the end of that year.

Lieber said the current decline might clip about the same amount off REIT stocks before they stabilize. “In three days we’ve probably done about half the move,” he said.

Many analysts say the annualized dividend yields on REIT shares, which are typically in the 3% to 6% range, should provide price support for the stocks.

“I’m a believer in REITs,” said the USC Lusk Center’s Ross, a former real estate accountant. “They are a very good way to invest in real estate for yield and long-term value.”