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Wall Street Journal: Real Estate Stocks Are on Sale but No One Is Buying

According to The Wall Street Journal:

Investors hate real estate, and investors love real estate. Both statements are true right now, creating one of the oddest dichotomies in markets.

More specifically, investors hate real estate investment trusts, which have lagged behind the S&P 500 by more than 15 percentage points over the past 12 months. REITs on average are trading a 16.4% discount to the assets they own, one of the widest gaps that has ever occurred outside of a recession, according to Green Street Advisors.

wsj-chart-peter

Yet REITs historically have outperformed similar private funds, according to Green Street. And when REITs are trading at big discounts, as they are today, they outperform by a lot.

The question is why investors would choose to invest in private funds when publicly traded REITs are on sale. The likely explanation is that investors believe private funds are less risky because their values don’t bounce around like stock prices do. Risk, though, isn’t volatility but rather the chance of a permanent loss of capital.

Veteran real estate investors know that the better reason for avoiding REITs is that entrenched managements often do little to close the gap such as selling properties. “There aren’t enough big sellers,” Green Street’s Peter Rothemund says.

To read the full article, click here.