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The seven-year bull run in global property and Real Estate Investment Trust (REIT) stocks finally stalled in the second quarter of 2007 in part due to the fall-out from the US subprime mortgage market, Standard & Poor’s Index Services said in its Quarterly Global Property & REIT report.
The ratings agency noted that the S&P/Citigroup Global Property Index dropped 4.5 percent in the second quarter of 2007, while US property and REIT stocks in general declined. Europe and Asia were also badly affected, with the S&P/Citigroup Europe Property Index worst hit with falls of 10.4 percent.
Only emerging market property remained unscathed in the second quarter, resoundingly bucking the trend in more mature real estate sectors. An unexpectedly strong performer in 2006, the S&P/Citigroup Emerging Market Property Index posted gains of 19.4 percent for the quarter and 26.7 percent on a year-to-date basis, eclipsing the global property sector as well as exceeding the performance of comparable equity market indices. The top five performing property stocks globally came from emerging markets, including three from China.
“A prolonged seven-year stretch of continuous gains, leading to excessive valuations, decreasing yields and a legitimate desire for profit taking caused a sell off for this sector. After such a bull run, global property and REIT stocks finally gave back some of the returns that have made them such an attractive investment in the last few years,” Alka Banerjee, vice president of Standard & Poor’s Index Services, said.
U.S. real estate deals fall five-fold
High leverage, which provided much of the impetus for the large property company deals in the last few years, has lost its shine. For example, the total size of property deals in the U.S. dropped dramatically in the second quarter to US$6 billion, from over US$29 billion in the first quarter of this year.
S&P/Citigroup REIT indices, a subset of the global property sector, also suffered this quarter. Following the introduction of REIT legislation in the UK at the start of 2007, the S&P UK REIT index dropped 12.9 percent. Other notable REIT slumps include France, with the S&P index down 12.7 percent and Japan, down 10.8 percent, while Australia and Singapore were among the few with positive results.
“REIT indices for Europe, the US and the world fell, with Asia the only market to post a gain with a modest rise of 2.0 percent and UK REITs performing dismally,” Ms Banerjee commented. “Despite this, real estate investment trusts continue to attract widespread interest. Italy launched such a vehicle in July, following the UK and Germany’s launches this year, whilst China and India remain interested in REIT structure legislation, although they are currently wrestling with the expected contentious rise in property prices that REITs are liable to generate, versus the advantages of transparency, liquidity, and tax advantages.”
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