REIT investments up this year

June 15, 2008|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Real estate investments can move in mysterious ways.

Even as prices of residential homes have languished, the stocks of companies that own and manage self-storage buildings, apartment complexes, shopping centers and office buildings have enjoyed a resurgence.

Big-buck and small-buck investors alike are looking for opportunities as they put a dismal 2007 performance behind them.

The average real estate fund is up 9 percent in this year, compared with the 2 percent decline of the average U.S. diversified stock fund, according to Lipper Inc.

Real estate funds are down 8 percent for the 12-month period that includes last year's general market worries over credit issues, as well as concern that real estate stocks and properties had become overvalued.

But the three-year annualized return is 9 percent and the five-year annualized return 16 percent. Some experts believe real estate investment trusts should have a home in most portfolios.

"There has been quite an inflow of money into real estate funds this year because people believe the market has already priced in many of the negatives about the economy and real estate," said Barry Vinocur, editor of Realty Stock Review in Novato, Calif. "And it generally is a bullish indicator whenever you see investors putting money in." REITs are the primary holdings in real estate funds, though they often also hold the stock of companies that provide products and services to the real estate industry.

A REIT invests in and owns properties. It is traded on an exchange like a stock and typically provides dividends comparable to bonds. REITs owning self-storage properties are this year's hottest category because of rising home foreclosures and increased need for storage space by companies.

"Investors have first been attracted by the relatively defensive aspects of REITs, which include the quality of their earnings and relatively high dividend yields," many around 5 percent, said David Harris, REIT analyst for Lehman Brothers Holdings in New York. "A second factor is that some of the aggressive shorting activity [betting on a stock to decline] from hedge funds is less noticeable this year." In this uncertain economy, the focus is increasingly on the best-financed REITs.

Two REITs recommended by Vinocur and Harris are:

*Boston Properties Inc., a disciplined REIT that owns and manages more than 130 blue-chip office buildings in New York, Boston, Washington, San Francisco and Princeton, N.J. Mature buildings are sold regularly, with the profits used to pay dividends and reinvest in development.

*Simon Property Group Inc., the largest publicly traded REIT by market capitalization, owns or has an interest in 168 regional shopping malls, 67 community shopping centers, 37 The Mills malls, 38 premium outlet centers and 10 other shopping centers or outlet centers in 41 states and Puerto Rico. Through joint ventures, it also has interests in 51 European shopping centers, six premium outlet centers in Japan, one premium outlet center each in Mexico and South Korea, and five shopping centers under development in China. The firm's geographic and tenant diversification reduces its overall risks.

"A lot of what happened with REITs in 2007 was because financing dried up, but larger, more established REITs had strong enough balance sheets to handle it," said Bridget Adams, REIT analyst with Argus Research in New York. "The one thing I'm worried about right now is office REITs, because if employment numbers worsen, we could see a decline in lease renewals."

Andrew Leckey writes for Tribune Media Services.

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