April 15, 2008 at 1:00 am by Tom Lydon
Inverse or leveraged exchange traded funds (ETFs) are on investors’ radar these days and real estate is no exception.
UltraShort Real Estate ProShares (SRS) is an ETF that tracks twice (2x) the inverse of its underlying index, The Dow Jones Real Estate Index. That means, when the index heads south, PRS heads up twice that, and vice versa.
One of the top holdings of the index is the Simon Property Group (SPG), an Indiana-based retail mall developer. With lofty valuations at 52 times earnings, SPG is a Fortune 500 company, the success is extracted from volumes of cheap credit which fueled the past seven year expansion, reports Steven Chang on Seeking Alpha.
But, he says, commercial real estate could be ripe for a contraction because historically, it lags residential real estate by about a year.
The warning here is that such growth is unsustainable. Regular mall tenants such as The Gap or American Eagle are posting 10%-20% declines in revenue. This growth also fuels the REIT sector, which thrives on the possibility to make new deals upon other deals.
