By John Wasik
CHICAGO, July 24 While there's some debate over
whether the U.S. residential market is in recovery mode, there's
a stronger case for a rebound in commercial properties.
Real Estate Investment Trusts (REITs), which invest in a
variety of income properties and mortgages and are listed on
stock exchanges, often serve as a bellwether of consumer and
commercial economic activity, as they will show earnings growth
in a general recovery.
Aside from the economic recovery narrative, REITs make sense
for investors who are hunting for yield. Although REITs often
march in lockstep with stocks during recessions, they can move
in different cycles, dictated by movements in commercial real
estate. REIT managers also are able to buy more properties when
interest rates are low.
REIT exchange traded funds have recovered smartly over the
past three years. The S&P Global REIT index, which includes
properties from developed and emerging markets, was up 12.56
percent year-to-date through July 23. That compares to 8.67
percent total return for the S&P 500 stock index during the same
That lends credence to the theory that the U.S. and
developed countries are slowly limping toward an upturn - at
least in property markets. A stronger economy and job market
translates into more people shopping, renting, traveling and
moving - and storing their stuff.
A large portion of the residential gains may be due to
increased building of apartment buildings as more people have
decided to rent rather than own. Increased commercial building
doesn't precisely track general economic activity, but it may
indicate that investors are more confident. And increased travel
activity helps the hospitality industry.
HOW TO INVEST
There's a range of exchange-traded or mutual funds that
invest in real estate stocks and REITs. For instance, some REITs
specialize in just shopping malls and retail outlets. But while
you can find a REIT that specializes in any property sector from
apartment buildings to health care, I recommend portfolios that
invest in a variety of properties.
Diversified REIT ETFs can give you a sampling of real estate
from across the world. The SPDR DJ International Real Estate ETF
, with a 4 percent yield, invests globally. The First
Trust S&P REIT Index concentrates on U.S. properties.
Still skittish about the American market? Then consider the
Vanguard Global ex-U.S. Real Estate ETF that invests
globally and avoids the American market.
REITs must distribute nearly all of their taxable income to
shareholders. They are traded as stocks on exchanges, but hold
multiple properties in their portfolios. Some are highly
diversified while others may focus on a specific sector such as
warehouses or office buildings.
For income investors, REITs offer higher yields. The yield
on the Vanguard REIT ETF was 3.25 percent, for example.
In contrast, the US 10-year Treasury note has been yielding
under 1.5 percent lately.
A note of caution: REITs are no substitute for bonds that
you hold to maturity. Their returns are not guaranteed and they
can be just as volatile as stocks. They declined in 2008 and
early 2009. If the recovery scenario does not play out, they
could drop in value again.
Be particularly careful with non-listed or "private" REITs,
which are typically sold through brokers and contain high fees.
Regulators have been scrutinizing them over the past year. I
recommend avoiding them unless you have them fully vetted by an
independent adviser such as a certified financial planner,
accountant or chartered financial analyst.
One more wrinkle: Lately the U.S. bond market has been
reflecting the possibility of another economic slowdown and euro
zone angst - 10-year yields are still near all-time lows - so be
careful. REITs are best for long-term investors who plan to hold
them. They should comprise no more than 10 percent of your
income portfolio. Property cycles can be just as fickle as
general stock market movements and take many years to play out.