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REITs go from black to red in just 3 weeks

Since July 1, the Morgan Stanley REIT index has fallen 8.5%, sending the REIT sector from the black to the red in almost the blink of an eye. REITs posted a total return of 13.5% in the first half of 2002, but they have already given back all of their first-half gains thanks to the past three weeks’ market turmoil.

The liquidity that drove REITs higher in second quarter 2002 is the same factor bringing them down in today’s market, according to Merrill Lynch analyst Steve Sakwa. "The selling pressure is not coming from dedicated REIT mutual funds, but from non-dedicated investors getting redemptions and being forced to sell securities across the board," Sakwa wrote in a report on the current state of REIT valuation.

Has the market hit bottom, or can REITs expect to slide even further before the upturn begins? "To assess how much further downside risk there is to the REIT sector, we looked at trough valuations figures and determined that the Morgan Stanley REIT index could fall another 15% before reaching valuation levels achieved during the last ‘bear’ market for REITs, which was late 1999/ early 2000," Sakwa stated.

The upside to the bad news is that REITs did manage to outperform the broad equity market last week. The Morgan Stanley REIT index declined 4.9% while the S&P500 fell 8%.

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