Big returns by REITs might be at an end

ON THE MONEY

Your Money

April 02, 2006|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,CHICAGO TRIBUNE

You may not be one to rock the boat.

But when it comes to investing, sometimes an unexpected wave can rock you. So when you see that you have been cruising along, riding an investment up 300 percent for five years, it might pay to pull back.

That's where real estate investment trusts, or REITs, are now, even after a rocky couple of weeks. They have fallen about 3 percent, but that's after being one of the strongest investments of 2006. The NAREIT U.S. Real Estate Index still is up about 12 percent this year, compared with about 5 percent for the S&P 500.

Analysts are warning investors to be cautious, and financial planners are ratcheting back clients' exposure.

For example, Patrick Doland, a Northbrook, Ill., financial planner, has been cutting back on REIT funds. Typically, he likes his clients to have about 5 percent of their portfolio in REITs, because real estate can act differently than stocks and bonds, often providing solid returns when the other investments are disappointing.

But with money pouring into REITs, and the prices climbing so sharply, many clients are overexposed, he said, with REITs making up 7 percent or 8 percent of their portfolios. That's too much, Doland said.

So while he has allowed some clients who depend on REIT dividends for income to have REIT exposure a couple of percentage points over the usual recommendation, he is letting them know they had better be prepared to see prices fall.

The Leuthold Group of Minneapolis also has warned clients that REITs are "very overvalued," and it estimated recently that they could decline about 10 percent.

Leuthold analyst Andrew Engel said he has been particularly concerned about the way investors have been behaving with REITs. In 2004 and 2005, they poured money into REITs at a level similar to 1997, and that period of excess was followed by two years of very poor performance by REITs, he said. REITs fell about 10 percent.

Investors seem to be bouncing back and forth lately, unable to decide whether to stick with REITs in the hope of profiting from an acquisition binge in the sector, or to run for safety, Engel said. In January, investors pulled $1 billion out of REIT funds, and then changed course in February and early March, pouring $808 million in four weeks back into the real estate investment trusts.

Meanwhile, Michael Torres, manager of the Adelante U.S. Real Estate Fund, notes that investors have been nervous about REIT valuations for two years, but it hasn't paid to pull away. He said the commercial real estate market has been strong, and ample evidence suggests that REITs are not overpriced.

He points to recent acquisitions of REITs in which buyers paid prices about 11 percent above the value in the stock market. "Valuations have been validated," he said. "Just look at where square footages trade on Wall Street and Main Street."

Still, he added that investors would be foolish to expect a repeat of the 33 percent return they have enjoyed the past 12 months. "The easy money has been made," he said.

gmarksjarvis@tribune.com

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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