REITs.com

Affected by the stock market collapse, the credit freeze, and the housing and layoff crises, REITs  in the U.S. are being hit on all sides, but there maybe light at the end of the tunnel, maybe .

U.S REITs are subject to law that forces them to yield 90% of their net income to shareholders, therefore limiting their capital on hand. With limited cash, most REITs turn to financing in order to acquire new property, but financing has been difficult to obtain with the freeze on lending and credit from banks. Elizabeth Ody of Kiplinger states ,

"So REITs typically have to borrow to finance purchases of new property-usually, the more aggressive a REIT grows, the more money it needs to borrow. As credit markets have seized up, it’s become increasingly difficult for REITs to roll over debts as they become due."

Not only is the freeze on the credit market a large detriment, but so is the rest of the sour economy. As companies turn smaller and smaller profits, they either go out of business or restructure their obligations. REITs own a good amount of the property in which these companies occupy, and if they go out of business, they are vacating office space–a direct hit to a REIT’s revenue stream.

However, some believe that as the credit market recovers, so will REITs .

"Since mid November, credit markets have shown some signs of thawing. REITs have responded by performing better, to put it mildly: From November 20 through January 23, the REIT index gained 31%. As credit markets return to normality, REITs stand to benefit further."

2009 will be an interesting year for REITs.  Some groups within the industry will fare much better than others and the determining factor will be how the overall economy bounces back. If lending is opened and profits begin to come back, REITs will be a great investment option once again.

The credit crunch finally seems to be taking its toll on the REIT sector particularly malls, however, some groups, notably Simon Property Group, continue to expand.

General Growth, owner/manager of shopping malls across 44 states,  has seen its growth stall due to its large debt position.  Joel Bloomer of Morningstar states,

“General Growth is one of the most leveraged REITs out there,” said Bloomer. “When you combine that with what’s happening in the credit markets, it’s a perfect storm for disaster.”

Apparently, the company is looking to refinance its large loan portfolio, but is having trouble finding the financing to do so in such a tight credit market. Many analysts agree that they are in the position that they are due to paying top dollar for properties on credit and misreading retail’s future.

On the other hand, Simon Property Group is looking to expand on General Growth’s demise. Sources say they will be looking to pick up close to 200 properties at a discount.

Simon Property Group avoided the pain of the recession by not being as aggressive these past few years as General Growth and by not leveraging their balance sheet. Bottom line, in this recession, capital is king and Simon Property Group looks to be a in a position for growth with their strong cash position and little debt.