| NEW YORK
NEW YORK May 4 Talk to any American homeowner,
and you'll probably encounter some symptoms of chronic anxiety.
Underwater mortgages, tanking house values and rampant
foreclosures have shaken our psyches regarding the wisdom of
But when it comes to real estate investment trusts (REITs)
that invest in commercial property, they've been doing quite
nicely, thank you very much. In fact if you invested in
Vanguard's REIT Index ETF during the lows of March 2009,
you would have tripled your money since.
Of course REITs come in many flavors; they fill their
portfolios with everything from office buildings to malls to
hotels to mortgages. Looking at the sector's fundamentals - low
interest rates for REITs that are borrowing to fund projects,
paired with rising rents and a recovering economy - some
analysts expect the happy days to continue for a while.
"I think investors will be surprised by the fundamental
improvements going on in REIT portfolios," says Wilson Magee,
director of global REITs for New York City-based investment
managers Franklin Templeton Real Asset Advisors. "The simple
fact is that virtually no construction has been going on, and no
new supply is being added. That makes for a long-term trend of
powerful earnings growth."
That's enough to make some investors, like Jacob Frydman, a
New York City real-estate veteran, lick their chops. He recently
formed United Realty Partners, a new real estate investment
company, with fellow investor Eli Verschleiser. He cites a
"perfect storm" of positive factors for REITs - low borrowing
rates, slipping vacancy rates and climbing rents. In fact,
office rents are projected to rise 1.9 percent this year,
according to the Commercial Real Estate Market Survey of the
National Association of Realtors.
"Buildings are now available significantly below their
replacement cost, and at a substantial discount to three years
ago," says Frydman. "Also a lot of debt that originated five
years ago is now coming due, and won't be able to be refinanced.
You're going to see some great opportunities to buy."
Of course, the rosy scenario is not without its risks.
Mortgage REITs that invest in loans instead of property can be
especially buffeted by the volatility in their underlying
securities. And some commercial REITs are weighed down by
portfolios of pricey properties acquired during the pre-bust
years of 2006 or 2007. In fact, delinquencies for office and
retail loans recently hit their highest-ever levels, according
to Fitch Ratings.
That's why some financial planners are advising clients to
tread carefully. "The current REIT market is still fraught with
challenge," says Bruce Specter, a wealth manager with Universal
Value Advisors in Reno, Nevada. "Though interest rates are low
and it would appear buying opportunities abound, there's still
plenty of downside."
Among the issues REITs face: State and local governments,
strapped for cash, will likely be squeezing big property owners
for taxes and fees in years to come. And when so much of REITs'
income has to go out in dividends (over 90 percent by law), that
can handcuff them when it comes to stockpiling cash for a rainy
day. Warns Specter: "That's awfully thin financial ice to be out
But it seems like Mr. Market isn't too concerned about those
drawbacks. So far this year, real estate mutual funds have
rocketed up by an average of 13.69 percent, according to data
from Lipper, a Thomson Reuters company. That's even better than
the S&P 500's year-to-date gains of 10.65 percent.
Investors are taking notice, and continue to bet on the
sector. So far this year they've chipped in $3.4 billion for
real estate funds, already surpassing the $2.8 billion they
contributed for all of 2011.
As a result of that investor interest and the gains of the
last three years, the sector is starting to look a little
pricey. One of the nation's largest REITs, Simon Property Group
, is hovering near 52-week highs - hardly the profile of
a beaten-down bargain sector.
That said, there are some buys to be had, according to
sector analysts. Research firm S&P Capital IQ, for instance,
has issued 'Strong Buys' on Essex Property Trust and
Home Properties Inc.. Franklin Templeton's Magee, for
his part, likes Starwood Hotels and mall specialists
Part of the logic behind the REIT run: baby boomers and
their insatiable appetite for dividends. The trusts are required
by law to pay out 90 percent of their taxable income in yield.
That's catnip to those entering their golden years, who aren't
about to get that much income from T-bills or plain old bank
"REITs are currently yielding around 3.4 percent, which is
significantly better than the S&P 500 and certainly better than
Treasuries," says Magee. "That's been a factor in their positive
performance, and why the market has started to price these
stocks up. But that yield is actually much lower than we've seen
historically, so we expect strong dividend growth for REITs