REITs Prove to be Surprisingly Reliable
It may seem surprising that some forms of real estate have been among the most reliable of investments.
Real estate investment trusts, known as REITs, invest in and own properties such as shopping centers, apartments, offices and industrial facilities. Readily accessible investments, these are sold directly like stocks or through mutual funds and exchange-traded funds.
"The REIT market outperformed the broader equity index in 2011, and good employment growth numbers should help all sectors of the REIT market in 2012," said
Improved private-sector job growth has a positive effect on consumer behavior, Case pointed out, and people appear to be "done with hunkering down" and seem to feel better about spending. There is pent-up demand with young people moving out of parental homes into apartments and, in the process, boosting apartment REITs, he said. Any uptick in manufacturing and trade similarly will benefit industrial REITs.
Since REITs are structured to distribute at least 90 percent of their taxable income to shareholders, they provide high yields in addition to liquid participation in the real estate market.
Some of the biggest REITs look attractive for investment.
"Income production is a fundamental reason why REITs have done relatively better than was expected," explained
A low-interest-rate environment and unimpressive dividend production in the broader stock market have boosted the image of REITs, Tjornehoj said. The best-performing REIT sector during 2011 was the self-storage market, while the worst performing was lodging and resorts, he said.
"REITs are a capital-intensive business that took it on the chin a few years ago but have settled down since then," said Tjornehoj. "We did not see the collapse in the commercial real estate market that some people had feared, and those funds that invested in them look relatively strong right now."
It is noteworthy that there is little overlap between the REIT market and the overall housing market, he said. The typical REIT fund has almost no exposure to residential mortgages, with the only potential connection that of apartments and manufactured homes. Home foreclosures make apartment REITs more attractive, he said.
Another REIT example,
The self-storage business is highly fragmented, fiercely competitive, employs short-term leases and has little product differentiation. To its credit,
"When it became apparent that the economy wasn't turning a corner, a lot of the REIT mutual funds moved into the blue-chip companies with strong balance sheets and a variety of assets," said
An investor new to REITs and real estate funds would start best with investments replicating the broad REIT market, said Tjornehoj. Here are two he considers worth looking into:
Despite all of their positives, REITs should only constitute a portion of an investor's individual portfolio because they do move in cycles.
"A neophyte investor couldn't go wrong with either of those two investments," concluded Tjornehoj. "But while they offer some diversification, they are nonetheless volatile in comparison to a much broader equity allocation."
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