With the real estate market struggling to gain a foothold, news that the stock market is pricing Real Estate Investment Trusts (REITs) at a 20% premium to their property values is worth sharing.
While prices have not bottomed out according to experts, the market is nearing a range that there is optimism in the long term outlook and that rents will provide positive cash flow for the REITs.
Most important, REITs have already soared from their lows. The Dow Jones Equity All REIT index, which lost three-quarters of its value from February 2007-March 2009, has doubled since spring. REITs now trade at a 20% premium to the net value of their real estate, estimates Green Street Advisors.
To bulls, that premium is deserved given hopes that commercial-property values will rise as the economy recovers. Feeding that optimism: Publicly traded REITs, unlike many private rivals, have raised debt and equity to strengthen their balance sheets, giving them the cash to buy distressed properties.
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There are still a lot of values in the REIT sector. The shopping and strip mall area is still very pressured and trading at a steep discount, like DDR and KIM.