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EDIT: I guess I don't know what I'm talking about.
I don't think this is a correct assessment. Dividend yield is not entirely what drives REIT valuations. Low interest rates drive up the price of all asset classes. When REIT valuations skyrocket, it is not due to investors being content with lower dividend yields / seeking yield. A bigger driver of REIT valuations skyrocketing has to do with the value of the underlying properties in the REIT undergoing price appreciation.
To get a closer look at how REITs affect their respective underlying property market, instead of looking at stock price performance, it is more important to assess Premium/Discounts to NAV for public REITs. Historically, this has been a strong indicator of future property values of the property sector the REITs are focused on. There is some arguments that this relationship has broken down in the last several years, but overall it is crazy to say that REITs are not representative of the real estate asset class they own.
EDIT: I guess I don't know what I'm talking about.
I get the feeling I'm being trolled, but I'll bite this go around.. Interest rates drive up the price of assets b/c of relative spreads. Simple example: if a 10-year treasury bond yields 2%, and the cap rate on a property was 4% with a similar investment horizon (equaling a 200 bp spread), then what do you think would happen if the 10-year treasury bond was 1%?
Leverage on properties do not drive pricing/valuation.. that is a financing decision of the buyer after valuation is determined / agreed upon.. obviously you can engineer a higher purchase price (and ultimately valuation) with leverage in your underwriting but I don't think that's what you were trying to say.
While rent escalations / lease-up of space are factors that management teams take into account when determining dividends, there are other factors that are involved as well. Dispositions, acquisitions, etc..
If a large number of tenant default / do not renew the lease, then that would impact the value of the real estate... whether or not this is above or below book value is irrelevant.. REIT stock do not trade on book value.. and if a REIT had a significant asset in its portfolio that was undergoing this situation, do you think the stock would trade up or down?
At the end of the day, you're buying a rental stream when you buy a piece of real estate. The security of the rental stream gets priced into the cap rate. These are all variables that can be used to analyze single property real estate, and can be extended to REITs. So back to my earlier point: REITs are and have historically pretty been good indicators of the overall market they own properties in, but to really refine how they affect the property market they participate in, you should look into the premium/discounts to NAV and not just share price performance.
Not quite. There was a really interesting piece by Green Street last week on this very topic. The problem is that REIT stocks are trading TOO MUCH like regular stocks and not enough like real estate.
Traditionally, discount/premium to NAV has been the way to think about value - especially with dedicated REIT investors (aka the REIT mafia). But their market share has declined and generalist investors are owning more and more. These guys tend to look at FFO and AFFO multiples as opposed to NAV. In a low cap rate environment, you need higher multiples to achieve NAV parity. This explains why so many great REITs are trading below NAV.
As to how REIT stocks represent the real estate market... hard to say. There's a disconnect right now between the private market and the public market, especially in gateway cities. If you look back at '06 and '07, REITs were a major net seller to the private market. Companies like Archstone sold out completely. Did REITs see everything coming? No. But they did better than most of the private market.
Long answer, but yes, I would absolutely include commentary on REITs when talking about the real estate market in general.
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