Bipolar Disorder

Last Updated: 30 January 2023

In early 2009, investors were clamouring to get out of commercial property funds, in many cases finding themselves locked in. Now, it seems, they can’t get enough of real estate.

In March last year, exchange-traded funds tracking real estate investment trusts (REITs) were at the bottom of the pile for their performance since the start of the credit crunch, with many having lost four-fifths of their value since 2007. Since then these ETFs have been amongst the best performers in the market.

The chart below shows the performance over the last year of four iShares property ETFs: the iShares FTSE EPRA/NAREIT UK property fund (IUKP), the iShares FTSE EPRA European Property Index Fund (IPRP), the iShares FTSE EPRA/NAREIT US Property Yield Fund (IUSP) and the iShares FTSE EPRA/NAREIT Asia Property Yield Fund (IASP). The performance measure is based on the total return NAV (i.e., with the reinvestment of dividends) and NAVs have been rebased to 100 on 9 March 2009, which marked the low point in prices for three of the four funds.

Their performance over the last year means that REIT portfolios are nowhere near as attractive to yield-hungry investors as they were in March 2009 – see the change in distribution yield on the four iShares ETFs over the same period in the table below.


Distribution Yield 9/3/09 (%)

Distribution Yield 9/3/10 (%)













Distribution yield is imperfect since it’s a backward-looking measure, calculated as a trailing sum of payouts divided by the current share price. In fact, the dramatic yield declines shown in the table are partly due to the REIT ETFs’ share price rises over the last year and partly due to the fall in absolute dividends paid out.

Taking IUSP, for example, the fall in the distribution yield to a quarter of the level seen this time last year is a result of both the 129% share price rise and a fall in the cumulative dividend payout (the sum of the four prior quarterly payouts) from US$0.91 on 9 March 2009 to US$0.48 on 9 March 2010.

In fact, to justify the current valuations of these REITs, which on a yield basis now offer quite a bit less than long-term government bonds, you’d have to expect dividends to start growing pretty quickly.

Is this realistic? A chart that recently featured in a Congressional Oversight Panel report on the US commercial real estate sector shows vacancy rates rising for all four commercial real estate subsectors.

It’s hard to see rents embarking on a steep rise in the face of this supply overhang. Indeed, they may continue to fall – as the report’s authors note, vacancy rates are being buffered by the existence of long-term leases. As these expire, and as the additional space accruing from boom-year projects comes onstream, there’s a good chance that rents may carry on downwards.

If one reads the sobering conclusion of the congressional report’s authors, which states that “there is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public,” then looks at the valuation of real estate investment trusts, it’s hard to avoid drawing the conclusion that one group – either Congress’s analysts or equity investors – has got it badly wrong.

Bipolar disorder, in other words. Are we about to embark on the next phase in the cycle?


  • Hello, my name is Luke Handt; I am a successful Bitcoin trader, financial analyst, and researcher. I have been studying the market trends for the conventional stock exchange system globally since I was in college.

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