REIT stocks have been under pressure for the past few months, and some analysts say a nasty short-term correction could be in order, especially if Treasury yields continue to rise. But bulls, when asked why they like the sector, often offer a very simple reason: "It's the dedicated pension fund money, stupid!" Glenn Mueller, a real estate investment strategist with Legg Mason and endowed chair of real estate at Colorado State University, hammered this message home, although a tad more eloquently, at the recent National Association of Real Estate Investment Trusts convention in Chicago. On a panel that was supposed to consist of bulls and bears, Mueller found himself as the lone REIT bull. Mueller argued that there is $50 billion of pension fund money sitting on the sidelines ready to be invested in direct commercial real estate properties and REITs. Because of this "dedicated" money, there is a floor for REIT prices -- meaning they can't drop too low, he said. "With $50 billion of capital standing ready to invest in private direct real estate, I believe there is a floor under REIT prices, as the private market will buy any REIT whose price drops below its net asset value," Mueller explained in a follow-up interview after the conference. (Net asset value, or NAV, is a method of determining the underlying value of a REIT's real estate portfolio based on real estate transactions in the private market. If a stock trades below the NAV estimates that sell-side analysts publish, then some argue it's cheap, and vice versa.) The overall money that goes into commercial real estate helps drive up prices and drive down property yields, helping the market think REITs' valuations are cheap based on their current NAVs. Mueller's idea is that if REITs look too cheap, then institutions will come in and either take companies private or buy up shares, providing a floor under pricing. Mueller's argument, which comes at a time where
more and more analysts on turning bearish on REITs for the short term, rests on certain propositions. One of the larger ones is that a privatization trend will continue to help the sector in the face of so much bearish sentiment.