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Bailout Doings Take Toll on Real Estate Funds

Kevin Baker

The value of real estate funds is eroding further. The average property fund we track shrank 5.64% for the week ending Thursday, Dec. 4, excluding inverse funds.

With just $20 billion of the first $350 billion remaining from the $700 billion Troubled Asset Relief Program's financial-rescue package, bank lending has not emerged to thaw out our credit-market ice age. Congressional leaders are pushing the Treasury to use the last of the money to bail out General Motors(GM Quote) and Ford(F Quote) instead of funding additional equity stakes in banks.

Treasury Secretary Henry Paulson has not yet requested the second $350 billion from Congress. One reason he's holding back is the preemptive brush-back by House Financial Services Committee Chairman Barney Frank, who believes Treasury ignored foreclosure relief. Senate Banking Committee Chairman Christopher Dodd joined with House Republicans in rejecting further TARP money until details are disclosed on how the first tranche was spent.

Although the Treasury's interim assistant secretary in charge of TARP, Neel Kashkari, believes the banks are now obligated to lend the government-supplied money, this has not abated the pace of foreclosures. Third-quarter foreclosures reached 2.97% of total loans, higher than at any point in the past 30 years, according to the Mortgage Bankers Association. The seasonally adjusted delinquency rate that excludes foreclosures on residential property hit 6.99%, up 58 basis points from the second quarter. That foretells continued trouble.

The worst-performing real estate fund last week was the DWS RREEF Real Estate Fund II(SRO Quote). This closed-end fund slashed another 17.11% as of the close on Dec. 4 from Nov. 26. The holdings showing the biggest losses were minus 28.3% in FelCor Lodging Trust(FCH Quote), minus 27.21% in Duke Realty(DRE Quote), and minus 19.68% in BioMed Realty Trust(BMR Quote).

Losing 16.26% for the period, the ProFunds Real Estate UltraSector ProFund(REPSX Quote) had the second-worst week among real estate sector funds. One notable holding, CB Richard Ellis Group(CBG Quote), the world's largest commercial real estate broker and adviser to the FDIC on its real estate portfolio, complained of declining third-quarter office rents in London, New York City and Tokyo, and collapsed 27.72%.

The real estate outlook is not 100% negative. New mortgage applications doubled over the prior week as refinance volume more than tripled, according to the Mortgage Bankers Association. Paulson's proposal to offer subsidized 30-year fixed-rate mortgages at a 4.5% interest rate should be encouraging to qualified borrowers.

This is good news for the two ETFs tracking the homebuilders, iShares Dow Jones US Home Construction Index Fund(ITB Quote), up 6.39%; and SPDR S&P Homebuilders ETF(XHB Quote), up 4.60%.

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