Ugh. After the purchase of EOP, I felt that equity REITs had reached valuation levels that not only discounted the lifetime of my children, but eternity as well. With the purchases of Archstone Smith and the Pennsylvania REIT, we are at valuation levels near those at the EOP purchase. My metric is equity REIT dividend yields versus the 10-year treasury yield. When one has to give up 1.2% in yield to move from safe Treasuries to risky REIT equity, there is something amiss. The valuation levels embed significant assumptions for growth in rents, which is particularly dangerous when the bull cycle in commercial real estate is so extended.
As a side note, before the purchases were announced, REITs looked the worst from a technical standpoint in the financial space. Now they are the best. So much for the utility of technical analysis.
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Yes, another leg down and some of these might have started looking interesting again. Darn private equity.
Hi David,
Depends on the technical analysis. The trend in IYR is still positive on a monthly basis. In the very short term, yes, the trend was negative, but the monthly is the one that rules.
If we have more downside for about 2 more months, then, yes, the trend might turn negative.
For what its worth.
Technical analysis does vary depending on time periods. I use a mashup of the range statistic, 14-day RSI, and standard deviations off the 200-day MA. REITs looked bad compared to other financials. Worse yet, their valuations imply unrealistic rental growth assumptions.
“As a side note, before the purchases were announced, REITs looked the worst from a technical standpoint in the financial space. Now they are the best. So much for the utility of technical analysis.”
A few months have passed, so a quick comment on this comment. I’m just not sure what technical analysis tools you were using to make your determination of going from worst to best. Technical picture has been negative since breaking the 200 day moving average, having the 50 day break below the 200 day, and the head and shoulders top:
http://worldbeta.blogspot.com/2007/07/head-and-shoulders-journal-of-financial.html
Properly applied technical analysis would have gotten you out and kept you out during the bulk of the recent decline, and indeed did so for my REIT position. I have no issue with the utility of technical analysis.