Commercial real estate funds continue to thrive

Your Money

January 07, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Although residential real estate markets have struggled, commercial real estate investments have continued to prosper.

Proving an army of doomsayers wrong, real estate mutual funds and real estate investment trusts (REITs) have outperformed the Standard & Poor's 500 for seven consecutive years and could be poised to run their winning streak to eight this year.

The average mutual fund investing in real estate-related stocks gained about 33 percent in 2006, topped in performance only by emerging-markets funds, according to Lipper Inc. The three-year annualized return of 25 percent and 10-year annualized return of 15 percent also are impressive.

Some reasons for that success: Development of new properties has been cautious and gradual, pension funds are looking to diversify their holdings, and large investors are aggressively taking real estate investment firms private.

For example, Blackstone Real Estate Partners, an affiliate of the Blackstone Group, agreed in November to acquire billionaire Sam Zell's Equity Office Properties Trust in the biggest takeover of a real estate company.

"Residential real estate is driven by emotion and consumer sentiment, while commercial real estate is driven by economics," said Alexander Goldfarb, an analyst with UBS Securities in New York.

Yet even the boldest prognosticators acknowledge it will pay to be a little careful in 2007. Despite a lack of ominous signs, any segment this hot for this long has to start cooling down sometime.

Traded on exchanges like a stock, REITs invest in and own properties such as shopping centers, offices, apartments and industrial facilities. There are more than 200 publicly traded REITs that provide dividend yields comparable to bonds.

Although REITs are the primary holdings within real estate mutual funds, the funds often also hold stock of companies that provide products and services to the real estate industry.

Barry Vinocur, editor of Realty Stock Review in Novato, Calif., recommends the shares of Developers Diversified Realty Co., Regency Centers Corp. and Kimco Realty Corp. in shopping centers; Simon Property Group in large malls; Boston Properties Inc. in offices; Ventas Inc. in health care properties and Vornado Realty Trust in widely diversified properties.

"While the office building and shopping-center REITs look just fine, the hotel and health care properties that have been delivering incredibly high returns would appear to be more troublesome," said Andrew Clark, senior research analyst with Lipper in Denver.

Three top-performing real estate funds that also look promising for 2007, according to Lipper, are:

Phoenix Real Estate Securities A, up 36 percent in 2006, thanks to holdings of Simon Property Group, ProLogis Trust and Host Hotels.

T. Rowe Price Real Estate Fund, up 37 percent in 2006, helped by Boston Properties, Archstone-Smith Trust and Equity Residential.

Cohen & Steers Realty Focus I, up 33 percent in 2006, boosted by its holdings of Vornado and AvalonBay Communities Inc.

"Someday, REITs will hit an air pocket, and you definitely shouldn't bet the farm on them," said Vinocur, whose favorite real estate mutual funds are the Vanguard REIT Index Fund and Vanguard REIT Index Exchange-Traded Fund.

"But if you have enough money to have a portfolio, some of that portfolio should definitely be allocated to commercial real estate."

Andrew Leckey writes for Tribune Media Services.

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