Debt Markets Rattling REIT Stocks

With the debt markets in disarray, commercial real estate is being re-priced and shares of real estate investment trusts have been sliding. But some argue the stocks have gotten cheap and are pricing in too much danger.

Buying the sector here may just bring more short-term pain -- something even the bulls admit.

On some valuation metrics, however, REITs look attractive.

For instance, the yield on the iShares Dow Jones Real Estate Index(IYR) is now 4.2%, compared with a yield of 3.94% on the 10-year Treasury Note.

For most of the past two years, the sector's dividend yields have been lower than those of Treasuries, which often compete with REIT stocks for investment dollars because both offer steady payouts.

While the dividend issue is a slight positive, the stocks continue to be more volatile than the broader market, as evidenced by betas generally above 1. Beta is a measurement for a stock's volatility, and a reading above 1 means the stocks are either rising or declining at a much faster pace than the broader stock market's respective moves.

Year to date, the price-only version of the US MSCI REIT Index is down about 17%, compared with a 4% increase in the S&P 500. The big drop comes as concerns over the health of the national economy and the fluctuating credit market have wreaked havoc on commercial real estate pricing.