Investing in real estate without risk

May 17, 1992|By Kiplinger's Magazine

It's hardly news that real estate has performed pathetically as an investment over the past few years. What may be surprising, though, is the recent run-up in real estate investment trusts (REITs).

REITs are pools of real estate holdings or loans that are bought and sold on the major stock exchanges. Like a mutual fund, you get diversification, professional management and less risk.

From 1987 through 1990 -- while the Standard & Poor's 500-stock index generated a total return of 56 percent -- property-owning, or equity, REITs went nowhere.

Then, in 1991, equity REITs outpaced the broad market, returning 35 percent vs. the S&P's 31 percent.

After the run-up, are REITs still a good buy?

The outlook for REITs is "exceptional," says Robert Frank, a real estate analyst at Baltimore-based Alex. Brown & Sons, an investment house.

Mr. Frank points out that many REITs have taken advantage of the drop in interest rates to obtain lower-cost capital, which is being used to buy properties at bargain prices.

"In three years you'll see a surge in cash flow since they've been acquiring properties at low prices," Mr. Frank adds. "And rents will turn around."

That combination will boost returns.

REITs also tend to be defensive investments -- no small consideration with stocks bumping against record highs. They're attractive for yield-oriented investors too, since they pay no income tax and pass essentially all earnings on to investors.

Finally, investing in REITs is a way to bet on an economic recovery, because an upturn will likely lead to a rebound in property values.

Not all REITs will perform spectacularly, of course. Of the 30 REITs Mr. Frank follows, he lists eight as "strong buys": Federal Realty Investment Trust, Health Care Property Investors, Health Care REIT, Nationwide Health Properties, Sizeler Property Investors, United Dominion Realty Trust, Washington REIT and Weingarten Realty Investors.

All trade on the New York Stock Exchange except Health Care REIT and Washington REIT, which trade on the American Stock Exchange.

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