High-quality real estate stocks have room to grow

March 01, 1992|By Jonathan Lansner | Jonathan Lansner,Orange County Register

A nationwide recession. An industrywide depression. A credit crunch.

It all adds up to the wrong time for buying real estate stocks, no?

Wrong. Real estate-related issues have come off the stock market's floor and have raced to impressive gains in the past 15 months.

"Real estate's a dirty word to many investors," said Allen Parker, manager of the United Services Real Estate Fund in San Antonio. "But there are 5,000 distinct real estate markets in the United States -- some hotter than a firecracker, others as dead as a doornail."

Overbuilding, overborrowing and overindulgence in almost every niche of the industry in the past decade returned to haunt the business.

But now as the dynamics for some real-estate issues change for the good, share prices are soaring. One index of homebuilder stocks is up 70 percent since last summer.

Analysts attribute the boom to views that some issues were oversold in a mass exodus from real estate stocks since 1987.

Added to that is speculation that the fall of interest rates to 20-year lows will give the industry a much-needed jump start.

Another change is how institutional investors are viewing real estate stocks.

The inability to turn investment property quickly into cash in today's credit-thin real estate economy has pushed some big-dollar investors to look at related stocks.

Shares of real estate firms and trusts provide participation in property holdings while maintaining liquidity. As part of this trend, analysts expect several large pension plans to convert some real estate holdings into publicly traded stock investments later this year.

"If you understand how [real estate stocks] have performed so well, you know there's still some up-side left," said Matt Avery, who managers the Franklin Valuemark Real Estate Securities Fund in San Mateo, Calif.

The recession has improved life for hardy homebuilders who have survived the economic downturn. These companies, analysts say, operate in a new climate with few competitors and small inventories of unsold homes in their markets. Those homebuilders who stick to building downscale housing will fare best, money managers say.

Also, the industry has gotten a recent round of good news. The Federal Reserve Board's moves Dec. 20 pushed mortgage rates to levels not seen since the 1960s, opening doors to many new buyers. Also, President Bush proposed in his State of the Union message several incentives for home purchases.

So if the economy does pull out of the recession, homebuilder profits will soar, analysts say. That will give an additional boost to already improved share prices.

Falling interest rates also have helped real estate investment trusts, or REITs. These are odd investment vehicles that take in ++ investors' cash, buy real estate and distribute the positive cash flow as dividends.

"REITs look so darn good with savings accounts coming due," said Catherine Creswell, an analyst with Alex. Brown & Sons, in Baltimore. She advises clients to stick to top-flight trusts. "Quality is very much the buzzword."

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