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Greece & U.S. REIT Investments: Is Now The Time To Try Some GUMBO?

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Greece & U.S. REIT Investments: Is Now The Time To Try Some GUMBO?

The Greek referendum "thumbs down" vote over the weekend has begun a process which apparently will spawn at least as many acronyms as there are possible outcomes.

Investors in real estate investment trusts have already overcome the fear associated with investing in an asset class which is referred to by an acronym: R-E-I-T.

Real estate investments are often referred to as an "alternative asset class," vs. traditional stock and bond investments.

However, allocating part of an investment portfolio to the alternative asset class of commercial real estate isn't necessarily wild or risky; it can be a form of diversification, a basic tenant of portfolio theory.

Related Link: 4 Popular Equity REIT ETFs: Should The Average Investor Take A Look?

Tired Of Alphabet Soup?

First there was "Grexit," or Greek Exit.

The recent vote has now spawned "GIMBO," or Greek Limbo.

When it comes to investing in institutional quality U.S. commercial real estate, the upheaval and uncertainty surrounding Greece and the eurozone may actually boil down to "gumbo."

GUMBO = Greek Uncertainty Market Buying Opportunity

No longer just a tasty Cajun soup, here GUMBO becomes an acronym for a simple REIT strategy inspired by the chaos.

Tale Of The Tape - U.S. REIT Reaction

An easy and cost-effective way for most investors to gain exposure to U.S. REITs is through ETFs.

The four largest REIT ETFs are the: Vanguard REIT Index Fund (NYSE: VNQ), iShares Dow Jones US Real Estate (NYSE: IYR), iShares Cohen & Steers Realty Maj. (NYSE: ICF) and SPDR Dow Jones REIT ETF (NYSE: RWR).

Here is a mid-day snapshot during the first day of trading following the Greek referendum.

gumbo_-_ychart_etfs.jpg

In the aggregate, these four REIT ETFs account for almost 94 percent of the total REIT ETF market.

Financial Metric Snapshot

Mid-day July 6, for comparison:

  • USD/Euro = $1.107
  • U.S. 10-Year Treasury rate = 2.33 percent
  • U.S. 2-Year Treasury rate = 0.61 percent
  • The Greek 2-Year Bond rate was up 1,565 basis points, to 50.48 percent

Why U.S. Equity REITs?

A flight to quality in the bond market, resulting in lower yields, is generally viewed as a positive for REITs by investors.

Income investors often view REITs as a "bond-like" investments, at least in part stemming from the requirement of paying out at least 90 percent of taxable income in the form of dividends to shareholders.

High quality U.S. real estate is often viewed by investors to be a good long-term investment, a hedge against inflation, and as a "safe haven" for international investors looking to safeguard their nest egg.

Bond Market & REIT Shares

In a rising interest rate environment, REIT shares tend to trade lower which results in an increase in the dividend yield, (keeping pace with higher bond rates).

This trend played out during the first half of 2015, with REIT prices sliding due to concerns about rising interest rates.

In fact, REIT shares have given up a large part of the gains from the relative outperformance during the 2014, which was fueled by a perfect storm of both strong real estate fundamentals and benign interest rates.

Related Link: The Biggest REIT Story Of 2014

Due to the recent share price pullbacks, the majority of REIT sectors are currently trading below net asset value (NAV) per share, one indication of relative value for investors.

REIT Sectors Could Benefit The Most

Two of the REIT sectors that are viewed as being most "bond-like," are single-tenant net-lease and healthcare REITs.

In both cases, the leases are typically long-term, often for 15 or 20 years.

gumbo_-_ychart_o_nnn_hcn_vtr_0.jpg

During 2015 YTD even the "blue-chip" names in these sectors have been under pressure because of expectations of a rising interest rate environment.

Investor Takeaway

If global investors flock to the U.S. dollar, U.S. Treasuries, and high quality U.S. real estate in a flight to safety, one way investors can participate in the upside is by owning shares of market cap weighted U.S. REIT ETFs.

Since Large-cap U.S. REIT blue-chip names dominate the top 10 holdings of these REIT ETFs, they are a simple way to partake in some "GUMBO" without having to create a recipe from scratch.

Posted-In: Long Ideas REIT Education Dividends Eurozone Top Stories Trading Ideas Real Estate Best of Benzinga

 

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