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The Week's Best and Worst Real Estate Funds

Kevin Baker

Don't let this week's huge move in real estate stocks fool you into believing the real-estate recession is over. The professional bargain hunters are out in force, buying out companies on the way down before other private-equity firms snatch up the deals.

Tishman Speyer Properties LP and Lehman Brothers Holdings (LEH Quote) sparked a rally in real estate investment trusts with a $13.5 billion agreement to buy Archstone-Smith Trust (ASN Quote). With the prospect of apartment rents rising 6% or more in 2007, the ability to acquire a block of 86,000 in one purchase was too good to pass up.

Also on the takeover list is Pennsylvania Real Estate Investment Trust (PEI Quote). A minor shareholder, London-based LaSalle Investment Management, reportedly offered $55 a share for the company.

Excluding two funds that short the sector, the potential for REITs to be bought out by private-equity firms sent the average real estate fund we track up 5.57% for the week ended Thursday, May 31.

The two funds leveraged to the Dow Jones U.S. Real Estate Index, Ultra Real Estate ProShares (URE Quote) and (REPSX Quote)ProFunds Real Estate UltraSector ProFund (REPSX) jumped an earth-shattering 13.31% and 9.90%, respectively.

The ProFunds Real Estate UltraSector ProFund is allocated to 90.3% REITs, 5.6% real estate, 3.6% forest and paper products and 0.5% diversified financial services. It has large holdings of Simon Property Group (SPG Quote), Equity Residential (EQR Quote) and Prologis (PLD Quote).

The biggest moves over the four trading days were Archstone-Smith Trust, up 20.67%, Highwoods Properties (HIW Quote) up 13.05%, AvalonBay Communities (AVB Quote) up 12.66% and Pennsylvania Real Estate Investment Trust (PEI Quote) up 11.62%.

Investors who followed the private-equity smart money sent the REITs soaring and crushed the two funds negatively leveraged to these stocks. UltraShort Real Estate ProShares (SRS Quote) dove 11.65%, while (SRPIX Quote)ProFunds Short Real Estate ProFund (SRPIX) felt the pain of a 6.26% slide.

Not participating in this week's rally are the homebuilders. Backtracking a little, the iShares Dow Jones US Home Construction Index Fund (ITB Quote) slipped 0.80%. Its largest holdings include Lennar Corp. (LEN Quote), NVR Inc. (NVR Quote) and KB Home (KBH Quote) with the largest declines going to M/I Homes' (MHO Quote) 4.16% drop, a 2.86% decline in NVR and a 2.67% loss in Skyline Corp. (SKY Quote).

This week, NVR experienced selling from three insiders. Also, Pulte Homes (PHM Quote) trimmed 0.98% from its stock and 16% from its employee base in an announcement of another 1,800 layoffs.

U.S. Treasury Secretary Henry Paulson may have declared the demand slump in housing to be over, but whether he's right remains to be seen. Bank lending standards are still restrictive and as many as 50 subprime lenders are out of business. This accounts for the sub-par performance of the (FSVLX Quote)Fidelity Select Home Finance Portfolio (FSVLX).

The fund is 31.5% invested in diversified financial services, 27.6% in savings and loans, 16.5% in banks, 16.1% in insurance, 2.6% in REITs and 1.6% in software. Countrywide Financial (CFC Quote), which represents 11.5% of the fund, fell 2.65% for the period. The biggest fall was the 9.94% drubbing of Clayton Holdings (clay Quote) -- a result of a negative outlook for its mortgage securitization surveillance service.

Buyers still believe that if they wait a little longer, prices may come down further. Until this mind-set changes, the real-estate recession will continue. So, selling individual homes one at a time is still tough. But, if you have a company that owns several thousand homes filled with renters, your chances of making a bulk sale have improved.