Will the Dramatic Run-Up in Real Estate Funds Last?
Investors are chasing yields and former homeowners are moving into apartments.
That combination has provided the one-two punch in 2010 of real estate investment trusts (REITs), those dividend-producing investments that trade as stocks and use investor capital to purchase properties.
Real estate funds are up 19 percent this year and 46 percent over the past 12 months, according to
"The bottom fell out of the REIT market in 2008, but starting in
REITs have almost no exposure to the residential housing market, which has definitely been a good thing for them, and the low interest-rate environment is also a plus.
"The lower that interest rates are, the better it is for REITs, since most are heavily-leveraged properties financing with floating rate instruments," said
For a basic REIT investment, he points to
Keep in mind that REITs have had a strong run-up that is unlikely to continue at this pace and that their dividend yield is currently low. A faltering economy could hurt them. If Treasury yields increase, investors seeking income might abandon them for the safer yields of government bonds.
"People are exasperated, can't tolerate earning zero percent on bonds and are wary of the stock market, as well," said
While 2 percent is better than zero percent, he said, keep in mind that an REIT is not a risk-free investment.
"REIT yields are not there right now, which means long-term return won't be there either," added Coumarianos. "Investors should not delude themselves into thinking that because it is a hard asset an REIT is safer than owning a common stock such as
With those caveats in mind, here are the real estate funds currently recommended by
T. Rowe Price Real Estate Fund (TRREX)
Up 51 percent over the past 12 months, has a large-capitalization, low-turnover portfolio of 39 holdings. Its largest portfolio holding is
Up 53 percent over the past 12 months, invests primarily in blue-chip REITs with strong balance sheets. It made a strong move into rental properties going into 2010. The largest of its 25 holdings is
Up 15 percent over the past 12 months, makes unusual moves to protect its investors, such as currently holding 20 percent of its assets in cash. Portfolio manager
When any investment is doing as well as REITs, the question is how long good times will last.
"I don't know that the REIT market is going to collapse, but we have seen some shakiness in sectors of the real estate market, such as a 9 percent decline this year in industrial REITs," said Tjornehoj.
Meanwhile, apartment REITs are up 29 percent and hotel REITs up 19 percent this year, he added. Maintaining that pace is unlikely.
"The real estate funds ran up last year but the fund flows weren't as big as they are this year," said Coumarianos. "So investors, in classic form, have put most of their money in after the run-up and missed the run-up."
Those who might usually keep an REIT allocation in their portfolios of five to 10 percent should now be around five percent because having a margin of safety makes sense, he concluded.
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