Real News‎ > ‎2014‎ > ‎December 2014‎ > ‎

25th December 2014

Singapore Real Estate

Homebuyers to gain from fuller price disclosures

Thumbs up for move to release net prices of individual units in projects

Source: Straits Times / Top of The News

THE upcoming move to disclose the net prices of individual units sold by developers will give buyers, property firms and policymakers a more accurate snapshot of the market, said experts yesterday.

The change, which was mentioned on Tuesday by the Urban Redevelopment Authority (URA) in a Straits Times Forum letter, will kick in during the first half of next year.

It will fundamentally alter the system in place now, which leaves buyers relying on prices quoted by developers and caveats filed with the Singapore Land Authority for a sense of what a unit is worth.

The URA has been releasing information on developer sales each month, including the median, lowest and highest net prices at each project.

While these give buyers a sense of what units in a project are worth, they will be armed with far more information once the URA releases net prices of individual units on its website, experts said.

Caveats, which are submitted by a buyer's lawyer, may not paint the full picture. They are typically based on the price in the sales and purchase agreement and may have not have factored in indirect discounts.

These can include a developer absorbing the additional buyer's stamp duty or handing out furniture vouchers, said Mr Lee Liat Yeang, a partner at law firm Rodyk & Davidson.

Such indirect discounts have become increasingly common in today's soft market.

"Developers may also prefer not openly cutting prices, as this would upset earlier buyers," said Mr Lee.

This means prices in caveats could be slightly inflated now, said SLP International executive director Nicholas Mak.

"The provision of net prices gives buyers an extra tool for negotiating. A developer now can't cite the value of a previous transaction as x dollars, when it isn't actually a net of those discounts," he said.

More detailed numbers would also help consultants and developers in studying the market, said Savills Singapore research head Alan Cheong, adding: "There could be certain patterns that broad numbers don't tell us."

The disclosures of net prices of individual units will not apply to projects after they have been de-licensed. This typically occurs a year after a project's temporary occupation permit has been obtained. The disclosures will apply only to new sales.

The change is good news to home owner and investor Mark Yap, 44. "It's more transparent for consumers and is the type of information we would like to know. For example, looking at how much an eighth-floor unit sold at, we can now decide how much more we are willing to pay for a ninth- floor unit," he said.

-By Rennie Whang

Companies' Brief

Perennial moving up to mainboard

Source: Business Times / Companies & Markets

PROPERTY player Perennial Real Estate Holdings, which had completed a reverse takeover of Catalist-listed nightlife firm St James Holdings and acquired Perennial China Retail Trust via a share swap, will be transferred from the Catalist to the Singapore Exchange mainboard at 9am on Friday, Dec 26. It will resume trading then.

Perennial Real Estate to start trading on Boxing Day

The announcement follows Perennial Real Estate's successful takeover of Perennial China Retail Trust, whereby Perennial China unit holders will receive 0.52423 Perennial Real Estate shares for each unit held.

Source: Channel News Asia / Business

SINGAPORE: Perennial Real Estate Holdings will start trading on the main board of the Singapore Exchange from 9am on Friday (Dec 26), the Singapore-based property firm said on Wednesday.

The announcement follows its successful takeover of Perennial China Retail Trust, whereby Perennial China unit holders will receive 0.52423 Perennial Real Estate shares for each unit held. The offer values each Perennial China unit at S$0.70. Perennial Real Estate has already completed its reverse takeover of nightspot operator St James Holdings.

Perennial Real Estate - which will have net assets of around S$2.6 billion following the Perennial China takeover - is an integrated real estate owner, developer and manager. Its Singapore properties include CHIJMES, Capitol, TripleOne Somerset and the House of Tan Yeok Nee, while its China projects include the Chengdu East High Speed Railway Integrated Development and Xi'an North High Speed Railway Integrated Development.

- CNA/ac

Global Economy & Global Real Estate

GIC unit buys into Bombay-listed Nirlon

Nirlon owns large-scale, high-quality IT office park in Mumbai

Source: Business Times / Real Estate

GIC affiliate Reco Berry has confirmed a deal to acquire a stake of up to about 39.2 per cent (about 30.8 million shares) in Nirlon Ltd.

In addition, it will make a cash offer of 222 rupees (S$4.63) per share to Nirlon's public shareholders for up to an additional 28.4 per cent of Nirlon. Assuming a full take-up of the open offer, Reco Berry will hold 62.6 per cent of Nirlon.

Separately, Reco Berry has also entered shareholder agreements to purchase up to 4.5 million shares from Alfano Pte Ltd, Deltron Pte Ltd, Kunal V Sagar and Rahul V Sagar, the existing promoters of Nirlon, for a price of 222 rupees per share, in aggregate representing 5.0 per cent shareholding in Nirlon.

It is also in talks with certain other shareholders to acquire up to 1.8 million equity shares constituting about 2.0 per cent shareholding in Nirlon.

The acquisition is subject to regulatory approvals and other conditions (including completion of the open offer) being fulfilled and will result in Reco Berry acquiring control in Nirlon.

Nirlon, which is listed on the Bombay Stock Exchange, owns Nirlon Knowledge Park (NKP). NKP is a large-scale, high quality, information technology office park located in Mumbai. NKP comprises seven blocks and is spread across a total construction area of 3.3 million sq ft.

Loh Wai Keong, managing director & co-head Asia, GIC Real Estate Pte Ltd said: "Nirlon has created a high- quality asset and we are excited about supporting the next phase of growth and asset enhancement to build sustainable value for this development. We look forward to working closely with the Sagars and their management team. This acquisition is consistent with our strategy in India to invest in assets that generate stable income streams over the long term."

The promoters, Kunal Sagar and Rahul Sagar, were instrumental in NKP's conceptualisation and development. Mr Kunal Sagar will continue as the executive vice-chairman and Mr Rahul Sagar will continue as the executive director of Nirlon Ltd.

-By Mindy Tan

Oil drop may lead to US real estate slowdown

Demand for office space likely to decline in energy-driven markets such as Houston

Source: Business Times / Real Estate

Homebuilders lag in US real estate recovery

Demand for office, retail, apartment properties outpacing home buying

Source: Business Times / Real Estate

Russians rushing to lock in mortgages

They fear borrowing costs will rise further after the rouble's weakness prompted the central bank to increase interest rates

Source: Business Times / Real Estate

Greentown surges in HK on share sale

Source: Business Times / Real Estate

Lone Star Buys HeidelbergCement Bricks Unit for $1.4 Billion

Source: Bloomberg / News

HeidelbergCement AG (HEI) agreed to sell its brick and roof-tile business to Lone Star Funds for $1.4 billion, as it looks to cut debt and return its focus to core products such as cement and aggregates.

The sale of Hanson Building Products includes North American assets outside of western Canada as well as operations in the U.K., the Heidelberg, Germany-based cement maker said in a statement today. The price includes a payment of as much as $100 million from Lone Star that’s dependent on the performance of the business in 2015.

The sale of the unit has been timed to take advantage of a recent recovery in U.K. construction markets, making building materials more attractive to private equity buyers. Lone Star has targeted unwanted building-products businesses, buying a gypsum-wallboard maker from France’s Lafarge SA last year.

“This is well ahead of expectations on price and close to what the chief executive officer talked about before he entered an official sale process,” London-based Berenberg analyst Robert Muir, who recommends buying HeidelbergCement shares, said by e-mail, adding that the price represents about 14 times the division’s earnings before interest, taxes, depreciation and amortization.

Debt Cutting

HeidelbergCement CEO Bernd Scheifele is trying to cut debt after his company joined a debt-fueled acquisition spree by cement and concrete makers, which sought rapid global expansion and diversification into markets such as building products.

It purchased Hanson Plc, a British building materials company, for about $18.3 billion in 2007 with returns from the deal damaged by the subsequent financial crisis. Heidelberg’s current market value is 11 billion euros ($13.4 billion).

Construction orders in the U.K. during the third quarter increased by 3.2 percent year-on-year, according to the Office for National Statistics. Scheifele said last month that U.K. brick sales were particularly strong. U.S. construction spending in October rose 1.1 percent from September, though housing market data show a recovery has yet to gain steady traction.

-By Andrew Noel and Alex Webb

New-Home Sales in U.S. Unexpectedly Fall to Four-Month Low

Source: Bloomberg / Luxury

Purchases of new U.S. homesunexpectedly declined in November to a four-month low, underscoring a lack of momentum this year in residential real estate.

Sales dropped 1.6 percent to a 438,000 annualized pace last month following a 445,000 rate in October that was weaker than previously estimated, Commerce Department figures showed today in Washington. The median estimate of 73 economists surveyed by Bloomberg called for a 460,000 pace in November.

Strict bank lending standards and rising property prices have bridled the industry this year following a pickup in 2013. Further growth in employment opportunities and persistently low borrowing costs may help provide a spark for the housing market in 2015.

Housing “will get back in tune in 2015 with these continued low mortgage rates and more job growth,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, whose forecast for a sales pace of 440,000 was the closest in the Bloomberg survey. “I don’t see any fundamental weakening going on here, it’s just more of the very slow back-and-forth in housing improvement.”

Another report from the Commerce Department showed more income is being generated as the job market improves. In November, personal income climbed 0.4 percent, the most in five months. Household spending accelerated as well.

Economists’ estimates ranged from a November sales rate of 425,000 to 480,000 after a previously reported 458,000 pace in October.

Stocks Climb

Stocks rose, with the Dow Jones Industrial Average climbing above 18,000 for the first time. The Dow advanced 71 points, or 0.4 percent, to 18,030.4 at 10:13 a.m. in New York. The Standard & Poor’s 500 Index gained 0.2 percent to 2,083.43.

New-home purchases were down 3.7 percent from November 2013 on an unadjusted basis, today’s report showed. The median price of a new home increased 1.4 percent last month from a year ago to $280,900.

Purchases decreased in three of four regions in November, with a 12 percent slump in the Northeast and a 6.4 percent decline in the South. Sales fell 6.3 percent in the Midwest and rose 14.8 percent in the West.

The supply of homes at the current sales rate increased to 5.8 months from 5.7 months in October. There were 213,000 new houses on the market at the end of November, the most since May 2010 and up from 210,000 a month earlier.

Existing Homes

Sales of new properties, which are tallied when purchase contracts are signed, are considered a more timely measure of the market than sales of previously owned dwellings, which are counted when a sale is final.

Purchases existing homes fell 6.1 percent to a 4.93 million annual rate last month, the weakest since May, from a 5.25 million pace in October, figures from the National Association of Realtors showed yesterday in Washington. Meanwhile prices continued to rise, with the median value increasing 5 percent from a year earlier to $205,300 last month.

That may make it harder for low-income and first-time buyers to enter the market, even with mortgage rates at the lowest levels since May 2013.

The average rate for a 30-year fixed mortgage was 3.80 percent in the week ended Dec. 18, according to Freddie Mac in McLean, Virginia. That’s the lowest level since then-Fed Chair Ben Bernanke signaled that the central bank could start to slow its monthly pace of bond purchases if the economy showed sustained gains, setting off an increase in interest rates.

Toll Brothers

“We all think the combination of the price increases from the builders and that shock of the move in rates so quickly chilled the market,” Douglas Yearley, chief executive officer of Toll Brothers (TOL)Inc., said on a Dec. 10 earnings call. “And so from the summer of 2013 until the late summer of 2014, business was good, but business was flat.”

Still, Horsham, Pennsylvania-based Toll Brothers and other homebuilders remain optimistic, with confidence among those companies hovering close to a nine-year high this month, according to the National Association of Home Builders/Wells Fargo sentiment gauge.

“We’ve seen some signs of pretty significant improvement since the end of the summer,” Yearley said. “I think the buyers are still a little bit skittish, and we’re working through this recovery, but as we’ve said, it’s going to be a bit bumpy.”

Fed policy makers are closely monitoring economic data as they debate when to raise their benchmark interest rates following the worst recession in the post-World War II era.

Home Construction

Commerce Department data last week showed that the pace of U.S. home construction slowed in November, with housing starts declining 1.6 percent to a 1.03 million annualized rate. Building permits also fell, showing construction is also unlikely to surge in the immediate future.

Sustained labor-market improvement, pent-up demand and a growing population will also lure buyers into the market in the coming year, Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut, wrote in a note to clients yesterday.

“2014 was close to a lost year for the housing recovery,” Stanley said. “With the pace of household formation beginning to creep back toward normal, the demand for homes is likely to firm.”

-By Victoria Stilwell

Greentown Surges in Hong Kong on Stake Sale to Building Firm

Source: Bloomberg / News

Greentown China Holdings Ltd. (3900), whose chairman ended a share sale to a rival developer, surged the most in 2 1/2 years in Hong Kong after it agreed to sell 24 percent of the company to a state-owned construction group.

The shares of Greentown, based in Hangzhou in eastern China, rose 21 percent, the most since June 2012, to close at HK$7.65. They resumed trading today after the stock was suspended on Dec. 22. The shares had dropped 10 percent on Dec. 19 when Greentown said the plan to sell a same-sized stake to Sunac China Holdings Ltd. (1918) was terminated.

Greentown, founded by chairman Song Weiping, will sell the shares instead to China Communications Construction (1800) Group, the parent of the nation’s biggest building firm, for HK$6 billion ($773 million), or HK$11.46 per share, an 81 percent premium to the closing price on Dec. 19. The construction firm will become one of the two largest shareholders and Song’s holding will drop to 10 percent from 22 percent.

China Communications Construction may increase its stake in Greentown in the future, said China International Capital Corp. analysts Eric Zhang and Cheng Yang in a note.

“We do not rule out the possibility that it would eventually become Greentown’s largest shareholder and turn Greentown into its real estate platform,” they said, referring to the state-owned company. They have a buy rating on Greentown.

Song had said he was wrong to sell a stake to Sunac as the two firms “don’t blend,” paving the way for the termination of the agreement reached in May.

China Communications Construction will get two out of four executive board seats, with one of them being a co-chairman role, according to an exchange filing today.

Hong Kong’s Wharf Holdings Ltd. (4), which bought shares in Greentown in 2012, will continue to hold 24 percent of the Chinese developer, while Greentown Chief Executive Officer Shou Bainian will have his stake cut by half to 8.1 percent.

-By Michelle Yun

GM Sells NY Hudson Riverfront Site for 1,177 Residences

Source: Bloomberg / Luxury

SunCal and Diversified Realty Advisors bought the site of a former General Motors assembly plant on the Hudson River north of New York City to build properties including 1,177 residences and a hotel.

SunCal expects to break ground next year at the site in Sleepy Hollow, about 30 miles (48 kilometers) north of New York City, and open the first residences in 2017, said Frank Cappello, president of the company’s eastern region. The purchase was completed yesterday in New York, he said.

“Westchester County is so supply-constrained that this is a very unique opportunity to develop anything of scale,” Cappello said in a telephone interview. “We’ve been targeting real estate where it’s not hard to predict that people want to live there, but it’s hard to create the homes and other uses.”

The land, a 97-acre (39-hectare) parcel, sold for $39.5 million, according to a person with knowledge of the deal, who asked not to be named because the terms aren’t public yet. Cappello declined to discuss the price. Bill Grotz, a General Motors spokesman who confirmed the property was sold, also declined to discuss details of the transaction.

“We support the redevelopment of former GM sites and are pleased with the positive outcome achieved in Sleepy Hollow,” Grotz said in an e-mailed statement.

Housing Mix

Housing at the project, to be called Lighthouse Landing, will be apartments, condominiums and townhouses, according to Cappello. The hotel will have 140 rooms. The development, located between the Metro-North Hudson Line railroad tracks and the river, will have 135,000 square feet (12,500 square meters) of retail space and 35,000 square feet of offices, according to documents filed today with the Westchester County Clerk. The developers will set aside about 45 acres of open space, including 16.1 acres on the waterfront, according to the documents.

“It strikes every hot button that a developer would want,” Jonathan Stein, managing partner of Summit, New Jersey-based Diversified Realty, said in a telephone interview, citing the proximity to the rail line, the Hudson River and New York City. Stein has been working to buy and develop the site since 1999, a process delayed by a public reviews, lawsuits between government agencies and the financial crisis that led to GM’s bankruptcy.

In the area that includes Westchester, the median sale price of an existing single-family home was $489,000 in the third quarter, up 1.4 percent from a year earlier, according to the National Association of Realtors.

California, Texas

SunCal, based in Irvine, California, acquires and develops major residential properties and commercial developments. It has communities under development in California, Georgia, Nevada,Texas and Virginia.

Diversified Realty’s existing portfolio and project pipeline includes the operation and development of over 6,000 residential units and 600,000 square feet of commercial space across New York, New Jersey, Pennsylvania, Maryland and Connecticut.

Sleepy Hollow was the setting of stories by author Washington Irving, who wrote in “The Legend of Sleepy Hollow,” published in 1820: “The whole neighborhood abounds with local tales, haunted spots and twilight superstitions.”

-By John Gittelsohn

Cuba Property Claims, Yielding Pennies, May Spur Talks

Source: Bloomberg / News

With the U.S. and Cuba (CUBA) moving to normalize relations and perhaps end a half-century trade embargo, the impoverished Caribbean nation can afford to pay Americans whose assets it nationalized after the 1959 revolution maybe 2 percent of the value of the seized property.

That’s why Cuban and U.S. negotiators are likely to search for other ways to compensate companies including Coca-Cola Co. (KO), which lost $27 million in machinery and real estate, and individuals such as Carolyn Chester, whose family lost an 80-acre farm on what was then known as the Isle of Pines.

“I’d rather be paid a fair settlement over a period of time than pennies on the dollar in one lump sum,” Chester said. “I know the Cuban people are poor, so maybe we can work something out intelligently.”

President Barack Obama’s surprise announcement last week that the U.S. will seek to establish diplomatic ties with Cuba and ease economic barriers resurrected an issue that had largely faded from public view in the decades since Fidel Castro grabbed power and nationalized foreign-owned assets.

The U.S. recognizes more than 5,900 claims against Cuba stemming from the expropriation of property owned by Americans in the aftermath of the revolution, according to the Foreign Claims Settlement Commission, an arm of the Justice Department. The claims were worth about $1.8 billion at the time; today, they total about $7 billion with interest.

Biggest Claims

More than 80 percent of the claims are held by individuals, according to a 2007 study by Creighton University School of Law in Omaha, Nebraska. The largest ones are held by companies. They include a $71 million loss suffered by what was then Exxon Corp. (XOM) over the seizure of an oil refinery in Havana Harbor and a $267 million claim by the Cuban Electric Co. That claim now belongs to Office Depot Inc. (ODP) through a series of corporate acquisitions.

Under the 1996 Helms-Burton Act, the U.S. can’t lift its decades-old embargo -- triggered in part by Castro’s seizure of property -- until the Cuban and American governments agree to settle the outstanding claims. Under another law, it will fall to the U.S. State Department to negotiate the value of the claims with the Cuban government. The two nations may settle for a fraction of what’s owed in talks that could take months, or years.

Congressional Demands

A Republican-controlled Congress, perhaps split between lawmakers eager to settle to encourage broader trade with Cuba and others opposed to wider relations, may also make demands as part of the negotiations, said Michael Kelly, a Creighton law professor who worked on the report.

“These things are not going to get resolved before we’ve normalized diplomatic relations,” said Marie Harf, a State Department spokeswoman, declining to estimate the ultimate payout on the claims. “Obviously, they’ll be part of the conversation.”

Patrick Borchers, another Creighton law professor and the report’s principal investigator, said “the best estimate” is that Cuba can afford to pay “maybe 2 cents on the dollar in hard currency” to resolve claims. Returning seized assets, like warehouses, factories and farms, may be even harder since many no longer exist.

While Cuba acknowledges its debt, it disputes the amount owed and is likely to advance counterclaims against the U.S., he said. And the country may also face claims from Cuban families now living in the U.S. who had property seized; they’re not among the 5,900 claims recognized by the commission.

‘Really Complicated’

“People are just going to have to recognize the reality of the current situation,” Borchers said in an interview. “It’s really complicated.”

The Creighton team suggests the U.S. and Cuba could create a tribunal to referee compensation demands. Two decades ago, such a tribunal resolved claims of Americans who lost property in Iran’s revolution. Claimants with losses under $250,000 received full payment plus interest, according to the settlement commission.

For Cuba, such a tribunal might reward claimants with development rights or distribution licenses instead of cash, Borchers said.

“Iran had money because of oil, and Cuba doesn’t really, although it does have some significant natural resources,” Borchers said.

For instance, Starwood Hotels & Resorts Worldwide Inc. (HOT), which controls a $50 million claim once belonging to International Telephone & Telegraph Corp., might be satisfied with “attractive undeveloped property and a tax-free zone,” while Coca-Cola might seek distribution rights for its soft drinks, Borchers said.

‘Very Flexible’

“The U.S. government has proven to be very flexible and creative in getting done what it needs to get done at the time of normalization of relations,” said Timothy J. Feighery, a partner at Arent Fox LLP and a former chairman of the settlement commission.

“The Cuban government has to think too that this will be not a big amount of money in the greater scheme of things once sanctions are lifted and full economic relations are restored,” he said.

Trey Sarten, a spokesman for Stamford, Connecticut-based Starwood, didn’t immediately respond to phone and e-mail messages seeking comment on the claims. Ann Moore, a spokeswoman for Atlanta-based Coca-Cola, said the company won’t speculate on its actions if sanctions are lifted. Karen Denning, a spokeswoman for Office Depot, and Exxon Mobil Corp. spokesman Alan Jeffers declined to comment.

Licensing Proposal

Another proposal has been floated by Mauricio Tamargo, who was chairman of the settlement commission from 2002 to 2010 and is now in private practice as a lawyer at Poblete Tamargo LLP in Washington. He urges creation of licensing fees on companies doing business in Cuba, with the cash returning to claimants.

Chester, who was six months old and living in Florida when her parents lost the Cuban farm into which they had sunk their savings, would welcome that solution.

“We never recovered,” said Chester, 57, who inherited the claims and is now represented by Tamargo. “I heard from my mother than once the embargo was ended, that’s when we’d get paid what we’re owed.”

Timothy Ashby, a Miami lawyer who has tried to negotiate private settlements for companies, said claimants can opt out of a future settlement and negotiate directly with the Cuban government, though others including Borchers say claim holders have no such right.

Collapsed Venture

Ashby said he reached a tentative deal for one company to enter into a cattle-raising joint venture with the Cuban government, only to see the agreement collapse because the claimant feared running afoul of U.S. trade sanctions. He has also tried to buy claims at a discount until the U.S. government stopped him.

In all but two of the 47 groups of claims to come before the settlement commission, property owners have won compensation, Tamargo said. Vietnam paid 100 percent principal plus interest while Romania paid just 38 percent years ago, according to the commission. The U.S. government makes it a priority to recover for seized assets, he said.

“Otherwise, U.S. nationals would be further persecuted if people didn’t think there was a day of reckoning with the U.S. government,” Tamargo said.

‘Outright Thievery’

David Wallace is the former chairman of Bangor Punta Corp., which lost assets including a sugar mill, and the former chairman and chief executive officer of Lone Star Industries Inc., which lost a cement factory. He has led the Joint Corporate Committee on Cuban Claims, which lobbied Congress on behalf of the largest corporate claimants.

A half-century after Castro’s seizures, he remains steadfast in his belief that Cuba broke international law and should pay. He leaves it to the U.S. government to determine how.

“That was just outright thievery,” Wallace, 90, said in an interview. “I feel deeply about it because I think it was outrageous that this property was taken without concern for the true owners and nothing was ever done about it.”

-By David Glovin and Toluse Olorunnipa

Real Estate Seen Winning as Builders Lose Amid U.S. Surge

Source: Bloomberg / Personal Finance

Investors who put their money in a fund (VNQ) devoted to real estate investment trusts have racked up gains of 65 percent, while investors in homebuilder stocks still haven’t recovered from the housing crash even after the U.S. economic rebound.

The gap will probably endure for years as U.S. job growth spurs demand for office, retail and apartment properties faster than Americans can buy new houses.

Almost half of institutional investors expect to increase their stakes in real estate over the next 18 months, according to a survey by BlackRock Inc. of 201 fund managers. Most of that money will be in assets outside the homebuilding sector that are less sensitive to mortgage availability or growing consumer preferences to rent rather than buy property, according to Jack Chandler, global head of real estate at BlackRock.

“We’d expect the homebuilders to see their businesses expand, but perhaps not as quickly as the for-rent sectors,” said Chandler, who oversees about $25 billion, mostly in U.S. and international commercial real estate. “I think that’d be for the next couple of years.”

The Vanguard REIT Exchange-Traded Fund, which began trading on Sept. 29, 2004, has gained 65 percent through yesterday, not including dividends. The iShares U.S. Home Construction ETF (ITB), which started on May 5, 2006, and includes homebuilders and home-improvement retailers such as Home Depot Inc. (HD), fell 49 percent from its inception through yesterday.

‘More Volatile’

The gap in inflows between the Vanguard REIT and iShares home-construction ETFs climbed to $17.8 billion as of yesterday, the greatest since the iShares fund’s inception. The net inflows were about $18.9 billion to the REIT ETF and $1.1 billion to the homebuilder fund in the last eight years.

“Real estate development such as homebuilding is a lot more volatile,” Jade Rahmani, an analyst with Keefe Bruyette & Woods Inc. who covers homebuilders and REITs, said in a telephone interview from New York. “Mature REITs generate steadier cash flows.”

REITs have performed well since the end of the recession as rents and occupancy rates increased for commercial real estate amid economic growth and limited construction. International and domestic institutional investors are pouring money into higher-returning investments such as office, retail and apartment properties, where rents are rising at a time when Treasury bonds deliver low yields.

Worst Crash

The homebuilding industry, which gets revenue from sales rather than rents, has struggled to recover from the worst housing crash since the Great Depression. Annual residential construction starts have totaled less than 1 million since 2007, according to Commerce Department data, compared with an average of 1.45 million in data going back to 1959.

New single-family homes sold at an annualized rate of 438,000 in November, the slowest pace in four months and 33 percent below the annual average since 1963, the Commerce Department said today.

The 11-member Standard & Poor’s Supercomposite Homebuilding Index is up less than 1 percent this year through yesterday and remains more than 50 percent below its July 2005 peak.

Demand for new homes has been sapped by tight mortgage lending standards and an unemployment rate that didn’t drop to its historic average until this year.

“Housing had a disappointing 2014. It should be a much more encouraging 2015,” Moody’s Analytics Inc. Chief Economist Mark Zandi said in an e-mail. “It’s not going to be gangbusters for housing, but it should be a lot better.”

Toll Shares

The housing ETF’s volatility was evident on Dec. 12, two days after Toll Brothers Inc. (TOL), the largest U.S. builder of luxury homes, forecast weak growth in 2015, sinking the company’s stock by the most in almost two years. Outflows from the ETF topped 84 million shares, the most this year, according to data compiled by Bloomberg. The next trading day saw an influx of almost 78 million shares, also a record for the year.

The homebuilding industry’s troubles date back a decade, when loose mortgage underwriting sparked a construction and land-buying spree that decimated the industry when credit dried up. Thirteen of the largest publicly traded homebuilders reported inventory writedowns and impairments exceeding $30 billion from 2006 through the first half of this year, according to an October report by Fitch Ratings Inc.

Renting Homes

Owners of more than 5 million homes have lost property to foreclosure since 2007, according to CoreLogic Inc. Many are still renting rather than buying houses. The share of homes sold to first-time buyers hit its lowest level since 1987, the National Association of Realtors reported in November, as factors such as soaring student debt and delayed marriages depressed purchases by younger buyers. The U.S. homeownership rate fell to 64.4 percent in the third quarter, the lowest in almost 20 years.

Home prices, which plunged 35 percent below their peak from July 2006 to March 2012, have since climbed about 30 percent, putting them out of reach of many first-time buyers.

“The consumer has been wary about the housing market,” Jason Yablon, global portfolio manager at New York-based Cohen & Steers Inc. (CNS), which has about $53 billion under management, said in a telephone interview. “Partially it’s credit, partially it’s still some level of uncertainty and partially it’s because home prices already moved quite a bit and maybe got ahead of some people’s affordability.”

Apartment rents have been rising to records since mid-2011, reaching $1,117 in the third quarter, according to Reis Inc. (REIS) The vacancy rate fell to 4.2 percent in the third quarter from 8 percent at the start of 2010.

Home Landlords

Not all REITs have been successes. Single-family rental landlords, such as Silver Bay Realty Trust Corp. (SBY) and American Residential Properties Inc. (ARPI), are trading below their initial offering prices. That’s partly because they’re a new asset class still trying to demonstrate their ability to make money, according to Anthony Paolone, a REIT analyst with JPMorgan Chase & Co.

“One of the challenges now is the conventional apartment business is just so good, it’s hard to get a real estate-dedicated investor to say, ‘I’m going to move away from apartment REITs and buy single-family rental guys,’” Paolone said. “You still have the business model that has to come along with the single-family rental guys, yet these apartment guys are raising rents at a pretty high clip.”

Office Rents

Office rents in the third quarter rose to $23.94 a square foot, the highest since March 2009 and 4.5 percent below the June 2008 peak, according to New York-based Reis.

“What’s driving commercial real estate is much more just about the supply and demand for commercial space,” Yablon said. “That’s being driven by GDP growth and job growth, and on top of that you’ve had a lot of capital seeking any sort of higher return than Treasuries in this environment.”

The Vanguard REIT ETF has an indicated dividend yield of 5.36 percent, compared with the current 2.16 percent yield for the benchmark 10-year Treasury note. The REIT ETF tracks the performance of the MSCI REIT Index and has 144 holdings, including shares of Simon Property Group Inc. (SPG), the biggest U.S. shopping-mall owner; Public Storage (PSA), the largest self-storage company; and Equity Residential, the biggest U.S. apartment landlord.

REITs were born in 1960, when President Dwight D. Eisenhower signed legislation creating a vehicle to give small shareholders, not just the wealthy, a chance to invest in income-producing property through real estate companies.

Distributing Earnings

Investors like REITs because, by law, they must pay out at least 90 percent of taxable earnings to shareholders as dividends. REITs don’t have to pay federal income taxes on those earnings in exchange. Most REITs distribute all of their earnings to get the full deduction. To qualify as a REIT, a company is required to invest at least 75 percent of its assets in real estate and get 75 percent of its gross income from rents or interest on property mortgages or sales of real estate.

“Commercial real estate isn’t very liquid,” Rahmani said. “But REITs you can buy and sell every day.”

-By John Gittelsohn and Brian Louis

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