Real estate funds flourish as property becomes more attractive investment

August 14, 1994|By New York Times News Service

Talk about a land rush: seven mutual funds focusing on real estate have sprung up so far in 1994, doubling the group's size.

Among them is CGM Realty, the first fund started by G. Kenneth Heebner, one of the industry's top-performing managers. Franklin Investments, Columbia, Crabbe Huson, American Capital, Evergreen and Pioneer also have new funds.

All invest in an assortment of real estate investment trusts, or REITs, which are publicly traded companies that manage portfolios of real estate investments and other real estate-related stocks, like home builders.

"You've got a number of bright people saying that real estate is an asset class that makes sense in light of a view of long-term inflation, and it's a particularly bombed-out area right now," said A. Michael Lipper, president of Lipper Analytical Services.

But, he added, "one could be cynical and say that just as we're cleaning up the last remnants of the last real estate speculation, we're starting it again."

Not so, insist the managers. They say there has been a fundamental shift in the 1990s toward securitization of real estate that makes analysis based on previous real estate cycles irrelevant.

The chief sources of real estate financing had been banks, savings and loans and insurance companies plus wealthy overseas lenders and private partnerships.

But the institutions were badly hurt in the last real estate bear market, in the late 1980s. And limited partnerships were unsound because investors had no liquidity, no control and no awareness the underlying value of the properties; their main motive was a tax break.

REITs fared better than many of the alternatives, in part because they did not buy property at the top of the market in the 1980s.

Mr. Heebner said that because of regulatory limits and policy shifts that have severely crimped the ability of traditional lenders to make real estate loans, "investors can be true partners of real estate developers," either directly or through mutual funds.

Moreover, the 1990s look very different from the 1980s. Interest rates are low and property prices are depressed, so for REITs, the costs of doing business are low, too.

The new financing and the slow turnaround in real estate created terrific returns for the six real estate funds that existed three years ago. They rose 13.7 percent a year, on average through July, compared with an 8.8 percent average annual gain for the S&P 500.

With real estate performing so well the last three years, is now the right time to buy? Sure, the managers insist.

REITs are a $40 billion market, easily absorbed by 14 mutual funds, Mr. Heebner said.

And considering that the market is projected to reach $100 billion in two years, "I would argue that the REIT mutual fund business is in its infancy," he added.

Heebner said he has stuffed CGM Mutual, a balanced fund he runs, with REITs up to its legal limit of 25 percent because "you get a generous level of current income combined with growth in income and some capital appreciation."

In his new fund, CGM Realty, Mr. Heebner is betting heavily on apartment REITs (41.7 percent in June). Growth is strongest there, he said, because of severe underbuilding for five years.

He likes Walden Residential Properties, Oasis Residential and Columbus Realty Trust. The next biggest sector is office and industrial REITs (27.1 percent). Largest are Liberty Property Trust and First Industrial Realty Trust.

Sam Lieber, who has run the Evergreen Global Real Estate Fund since 1989, started a domestic real estate fund in September. Reason: Increased opportunity created by new issues of REITs.

Most important, "because there were so many, and only a handful of analysts with track records in following REITs and underwriters were being so sloppy, opportunities arose from deals falling out of bed," he said.

The biggest sectors in the new fund in June were home builders (30 percent), apartment REITs (19 percent) and factory outlet centers (16 percent). Home builders look especially good because their prices are so depressed, Mr. Lieber said. He owns Continental Homes, Phoenix, Kaufmann & Broad and Del Webb among others.

Robert M. Steers, who co-manages one of the older funds, Cohen & Steers Realty Fund, said the strength of REITs in 1994 refutes the widespread belief that rising interest rates will hurt the sector.

He has bet most heavily on shopping centers (31.6 percent) and apartments (25.1 percent) in June.

How to choose among these funds? Because so many are new, BTC make sure the manager has adequate experience. And because the sector was bad for many years, Lipper said, "I wouldn't be too influenced by long-term performance."

Consider how much overseas exposure you want.

While Fidelity Real Estate Investment Fund had only 1 percent invested abroad, the Templeton Real Estate Securities Fund recently had 43 percent overseas.

Finally, check whether the fund is oriented more toward income or growth. CGM Realty yields 6.64 percent, compared with 5.06 percent for Cohen & Steers.

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