Real estate exchange traded funds (ETFs) have bounced in a range so far in 2011 along with Treasury yields, but higher rates could hurt the sector as the borrowing costs of companies and home buyers rise.
Within real estate ETFs, there are funds tracking the commercial and residential parts of the market.
Real estate investment trusts (REITs) had a surprisingly strong year in 2010 and part of the attraction is their dividends. SPDR Dow Jones REIT (NYSEArca: RWR) gained 28% last year.
“Thanks to a long period of low interest rates in the past decade, REITs amassed significant amounts of debt to grow and boost returns,” said Timothy Strauts in a recent Morningstar analyst report on the ETF.
While interest rates are still low, rates “will eventually rise, and this will increase REITs’ cost of capital and pressure asset values and reduce cash flow,” he wrote.
Some REIT ETFs:
- SPDR Dow Jones REIT (NYSEArca: RWR)
- Vanguard REIT Index ETF (NYSEArca: VNQ)
- iShares Dow Jones U.S. Real Estate (NYSEArca: IYR)
In residential real estate, there are ETFs that invest in home builders and related sectors. They trailed the S&P 500 Index last year and are lagging the market again in 2010.
Higher mortgage rates would impair an already weak housing market. According to Freddie Mac, the monthly average commitment rate on 30-year fixed-rate mortgages was 4.84% in March, down from 4.94% in February but up from 4.76% in January.
Some ETFs to consider:
The bullish view is that the U.S. economy is improving and the commercial real estate sector and the overall housing market could be showing signs of stability.
U.S. office vacancies are dropping and rents are on the rise, writes Kevin Grewal for SeekingAlpha. According to property research firm, Reis Inc., national vacancy rates dropped in the first quarter. Meanwhile, total occupied space for office buildings increased by 4.7 million square feet, with rents rising by $0.11 per square foot to $22.20.
For the housing market, CoreLogic’s national home price index diminished by 6.7% in February year-over-year, which was larger than the 5.5% drop in January year-over-year, reports Alistair Barr for MarketWatch. CoreLogic calculates that there were still 1.8 million residential units that were in foreclosure or other stages of distress as of January. Home prices decreased 0.1% in February year-over-year.
Nevertheless, Mark Fleming, chief economist at CoreLogic, believes that home prices could be stabilizing. “When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets,” Fleming remarks.
For more information on the real estate market, visit our real estate category.
Max Chen contributed to this article.