'Operation Twist' may open a window on apartment REITs

The Federal Reserve’s plans to push down long-term interest rates may open an opportunity for investors in apartment-building real estate investment trust ETFs to see a profit.

The Fed’s plan is to swap $400 billion in medium-term debt for long-term bonds and push down long-term rates, since yields move in the opposite direction of prices. That, in turn, could encourage the “REITs” to buy up more properties by cutting their cost of capital.

“While certain sectors of the real estate market like office and commercial space are more volatile, residential and apartment REITs may play right into the Fed’s hand,” writes SmartMoney columnist Avi Weinberg.

With home ownership less likely to be growing in the current economy — the Mortgage Bankers Association says home-loan applications are close to a 15-year low — demand for rental properties should be increasing, boosting rents and trimming vacancy rates.

The are a number of risks, however. Experts are split on whether the “Twist,” will have much effect, noting a similar move in the early 1960s had little apparent impact.

The financial crisis of 2008, based as it was on risk leaking out from real estate mortgages, cut interest in all things real estate, including all types of REITs and the 27 exchange-traded funds that invest in them.

But REITs that specialize in residential properties have returned 3.5% during the past five years and, according to S&P research, apartment REITs are back in the market looking to snap up properties.

Investing in real estate through ETFs does have drawbacks. Residential REITs were volatile going into and coming out of the 2008 financial crisis. REITs are also required to pass on at least 90% of their taxable income to shareholders, so ETF REITs pay fully taxable dividends.

Of the ETFs, iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ, quote) would seem to be in position to benefit the most from a successful execution of operation twist.

The ETF seeks to correspond generally with the FTSE NAREIT All Residential Capped Index and invests at least 90% of its assets in securities of the underlying index, which measures the performance of the residential, healthcare and self-storage real estate sectors of the U.S. equity market.

Of the other broad-based REIT ETS, none offers more than 20% exposure to the residential market.

While most investor money during the last few months has been going to short REITs, REZ has actually added $5 million in new investor money, according to data provided by Index Universe.

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