US real estate volatile but still good value
US-based Real Estate Investment Trusts (REITs) may see further share price volatility, but a deep correction is unlikely, according to ABN AMRO Asset Management.
Joe Pavnica, Chicago-based global property securities portfolio manager at ABN AMRO, said pricing would remain volatile in the sector, but predicted an annualised total rate of return of 5 to 10% over the next year. He disagreed with commentators who have claimed the US REIT market is overvalued by at least 20%.
Shares in US REITs have fallen sharply since February, affected by the deepening crisis in the US sub-prime mortgage industry and the US housing market. After a brief recovery in September, prices proved unsustainable and fell again leaving the segment down by almost 12% so far this year. At the depth of the market aversion to REITs in mid-August, they had been down by more than 15%.
Pavnica added: “The fallout from the US housing market and credit crunch have undoubtedly affected property yields and valuations and more negative news is likely from US financial institutions. However, the market has over-shot on the downside and we see opportunities.”
Solid supply and demand fundamentals and strong earnings growth are further reasons to be upbeat about US REITs, according to Pavnica. “Many investment institutions remain fundamentally underweight in the asset class, which means that demand for real estate securities from this group of investors should stay strong and put a floor under share prices,” he said.