REITs Still Good Long-Term Investment

Copyright 2005 The Deseret News Publishing Co.
Deseret Morning News (Salt Lake City) February 6, 2005 Sunday

REITs still strong, but don't expect top returns to continue

by Andrew Leckey

Enjoy, but don't get used to it.

That's the best way to view the dramatic performance of the past several years turned in by real estate stocks and the funds that invest in them.

These investments still make sense for the long haul because of the strong income and portfolio diversification they provide. No bursting of a real estate bubble seems imminent, either.

Yet the recent gains came courtesy of a unique confluence of declining interest rates and an investing public that had soured on most other segments of the stock market.

"The value of commercial properties has increased 30 percent due to the increased demand of institutional investors, who doubled their allocations in this area for pension funds and endowments," explained Sam Lieber, portfolio manager of Alpine U.S. Real Estate Equity Fund in Purchase, N.Y., up 38.10 percent over the past 12 months. "At the same time, those investors were decreasing their exposure to the overall stock market due to the 2000-2001 collapse."

There was a 30 percent rise last year in the National Association of Real Estate Investment Trusts (REITs) Composite Index, which tracks 193 publicly traded companies that invest in real estate properties such as shopping malls, office complexes, hotels and apartment buildings. That's the fifth year in a row it has outperformed other major benchmarks.

The REIT index performed even better in 2003, gaining 39 percent.

Total market capitalization of REITs has grown to $308 billion. The current average REIT dividend yield of 5.4 percent is three times higher than that of the Standard & Poor's 500. That's because 95 percent of a REIT's taxable income must by law be distributed to shareholders.

"Real estate funds over a 30-year period have produced a return of better than 14 percent, and long-term investors have no reason to expect they won't continue to produce this kind of return," said Barry Vinocur, editor of the Realty Stock Review newsletter in Novato, Calif. "But it's also fair to say that over the next four or five years they'll have a year that is less stellar."

Among real estate funds, Vinocur likes the $4.7 billion Vanguard REIT Index Fund (VGSIX), while a favorite publicly traded REIT is Equity Office Properties Trust (EOP), which owns about 700 office properties, 75 industrial properties and extensive undeveloped land.

Though predictions for overall REIT returns in 2005 are bouncing all over the board and range from a decline to a big jump, Vinocur expects a 4 to 8 percent gain. Investors focusing on three- to seven-year results should expect a return in the low double digits, he said.

Good signs: Hotels have rebounded from recession, 9/11 and SARS. Apartments have rallied, while office and industrial markets are expected to make gains over the next 18 months.

"Real estate has come to be much more appreciated for its stable performance and good diversification, but I don't think we'll repeat the returns of the last five years," cautioned Mark Blackburn, adviser to the AIM Real Estate Fund in Dallas, up 35.09 percent over the past 12 months. "We are looking for an increase of 3 to 7 percent in 2005, but, from a long-term standpoint, about 10 to 12 percent annually over the next few years is quite possible."

AIM Real Estate Fund's largest holdings recently included General Growth Properties Inc. (GGP), Simon Property Group Inc. (SPG), Boston Properties Inc. (BXP), Vornado Realty Trust (VNO) and Centerpoint Properties Trust (CNT).

"Real estate stocks could be dull the next two years, though dividends will grow," said Lieber, who suggests investing quarterly with little concern over volatility. "We are not in a bubble, but there are more dollars chasing property than property available, so REITs will have to rely on internally generated growth."
Alpine U.S. Real Estate Equity Fund's top holdings recently included MeriStar Hospitality Corp. (MHX), Alexander's Inc. (ALX), Impac Mortgage Holdings Inc. (IMH) and Prime Group Realty Trust (PGE).

"We recommend that investors keep 5 to 12 percent of their investment portfolios in publicly traded REITs," advised Vinocur. "They're especially good for IRAs and 401(k)s as a quick way to accumulate money for retirement."

The top-performing real estate-related stock funds with minimum investment requirements under $10,000 over the past 12 months, according to Morningstar Inc., were: Alpine U.S. Real Estate Equity "B" (AUEBX), $2.6 million; no load (no sales charge); $1,000 minimum investment; 888-785-5578; up 38.10 percent. CGM Realty (CGMRX), $786 million; no load; $2,500 minimum; 800-345-4048; up 35.52 percent. AIM Real Estate "C" (IARCX), $176 million; 1 percent back-end load; $1,000 minimum; 800-347-4246; up 35.09 percent. Alpine Realty Income & Growth "Y" (AIGYX), $501 million; no load; $1,000 minimum; 888-785-5578; up 31.02 percent. Third Avenue Real Estate Value (TAREX), $1.6 billion; no load; $1,000 minimum; 800-443-1021; up 28.16 percent.

Just don't get too cozy with those returns. Think long-term whenever considering real estate stocks or funds.

"Income and diversification of an individual's portfolio have made REITs a valued portfolio asset," said Jay Hyde, vice president with the National Association of REITs, a trade group in Washington, D.C. "Studies have proved that a portfolio with real estate stocks will perform better over time than one without them."

Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.

February 6, 2005