Once of the biggest casualties in the financial crisis has been REITs. Globally, these made astonishing gains during the property boom. But they’ve taken one heck of a beating since.

Eric Roseman says the US REIT sector is likely to recover first. That’s because Europe and Asia are behind the US in the credit crunch cycle and have further to fall.

Pending home sales index bounced 7.4% in September. And government-auctioned foreclosures create great property bargains. Eric says iShares Real Estate ETF (NYSE:IYR) is one good way of playing this recovery.

This from The Sovereign Society:

Since the onset of the subprime mortgage crisis 14 months ago, REITs  have plunged in value - with the biggest declines happening in Europe, Eastern Europe, and Asia.

The turning point for REITs came in early 2007. At the time, an enormous number of new offerings hit the scene and the “bubble” began to simmer. REIT sponsors went hog-wild, with easy credit and the lowest interest rates in a generation.

REITs boomed recently in the Pacific where policymakers introduced new legislation that allowed REIT structures in Japan, Singapore, and Hong Kong.

But REITs have plummeted more than 15% over the last 12 months in Singapore, and they’re down in excess of 45% in Australia. In Japan, J-REITs have tanked almost 30% over the last 12 months and remain 25% off their best levels in the United States.

The Big Chill

In addition to the problem of over-abundant supply, the ongoing credit crisis has also hit REIT values hard over the last year. That’s because developers and property managers require access to credit to expand or modernize existing properties.

With even the highest quality of loan candidates struggling to raise capital this year, it’s no wonder the sector has correlated almost perfectly with bank stocks.

In Asia, 2008 has been especially painful for REITs as the growing credit crisis, falling stock markets and plunging asset prices resulted in the cancellation of offerings.

The credit squeeze has made it much harder to raise equity and debt to finance deals. So now some smaller and mid-sized REITs are now threatened by questionable business models.

It’s the same phenomenon spreading to Europe and even fast-growing Eastern Europe as REIT values have collapsed. Even in red-hot China, many construction companies have either failed or remain technically insolvent as the big real estate boom cools off.

Beyond the Bear…Batting Cleanup on the REIT Crash

The United States REIT sector might lead the rest of the sector to recovery over the next 12 months, assuming the credit crisis ends and banks begin lending again.

But while U.S. REITs have shown signs of bottoming this year, regional REITs in Europe and the Pacific are still in the midst of sharp corrections.

Indeed, as economic growth slows across Europe and Asia over the next several months and more credit-related turmoil spreads to Europe, the United States is starting to look like a relative safe-haven. You see, the ongoing credit crisis hit America first. With the latest passage of the bailout bill in Congress last Friday, markets might start looking at the United States REIT sector as a bell-weather ahead of a recovery.

And we’re already starting to see some positive movement. Since July, the iShares Real Estate ETF (NYSE:IYR) has gained almost 10%, excluding dividends. It’s the same story for most banks over the same period, boosted by the Securities and Exchange Commission (SEC) short selling ban.

The U.S. REIT sector is worth watching carefully. The sector has already been trashed and - from a technical perspective - appears to have formed at least a short-term bottom in late July. Sentiment should improve following the bailout bill.

Still, the country is now in an economic recession and the ongoing contraction might last longer than average recessions because of the massive accumulation of debt and leverage-loan financing.

Pacific REITs will likely be forced to consolidate in the months ahead and that will pose regulatory challenges to corporate charters and shareholders. It’s too early to buy Asian REITs.

Europe, on the other hand, now faces a deeper credit squeeze as bailouts and a new wave of failures comes home to roost. The United Kingdom, Ireland, Spain and Denmark are all home to big real estate busts and it’s spreading. It is unlikely European REITs will bottom until at least late 2009.

Best Buys in Spain, US Foreclosures

For individual investors - especially dollar-based investors - the ongoing contraction in sun-belt values across the Spanish coast looks appealing.

The U.S. dollar is mustering a powerful bear market rally since its July lows, and it’s already soared more than 13% over the last 10 weeks against the euro. Combined with lower interest rates across the Eurozone later this fall or into 2009, financing costs should become more affordable for prospective buyers in the popular Costa del Sol region.

The United States can expect more government auctioned foreclosures in 2009, and that means big bargains for speculators and investors alike. Banks are desperate to remove non-performing loans from their clogged portfolio of real estate deals.

The last bear market in U.S. residential property in the early 1990s resulted in a plethora of deals for distressed buyers in Florida and California, among other states. This bout of real estate deflation now widespread across many regions will result in even greater bargains.

It’s no wonder Europeans have been active buyers of U.S. real estate since 2007 during a strong euro until recently. Now it’s time for Americans to buy domestic, too.

Source: Global REIT Boom Ends with a Thud, and Now It’s Time to Pick up the Pieces