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 Keen on real estate but fear risk? Look at REITs.
If you still associate real estate investments with swamp land in Florida and vacant high-rise buildings in Houston, it’s time to take a look at real estate investment trusts. Real estate investment trusts, or REITs, are publicly traded companies that own, develop and operate apartment complexes, hotels, office buildings and other commercial properties. Most invest in several properties, rather than a single hotel or office complex. And that has made them popular with investors who want to add real estate “without buying dirt,” says Mark Bass, a financial planner with Pennington, Bass & Associates in Lubbock, Texas. Bass says his clients typically invest 5% to 15% of their portfolios in REITs.
Investors who bought REITs last year are probably glad they did. The Morgan Stanley REIT Index, an index of about 100 REITs, rose 36% last year, compared with a 23% gain for the Standard & Poor’s 500 stock index. Pushing REIT prices higher: growing demand for office properties, high hotel occupancy rates and rising apartment rents.
Few analysts expect that kind of skyscraping performance to continue. This year, the index has lagged stocks, rising 2.4%, vs. 8.2% for the S&P. But some, including Andrew Davis, manager of David Real Estate Fund, believe REITs could provide annual returns of 10% to 15% over the long term. “When 10% to 15% doesn’t sound good, it’s time to go to cash,” he says.
Some reasons to buy:
Consistent performance is only one of the reasons investors should consider owning REITs, financial planners say. Some others:
Regular income. REITs are required by law to distribute 95% of their income to shareholders as dividends. As a result, REITs typically pay higher yields than stocks. Right now, the average yield for a REIT is 5.9%, compared with a measly 1.8% for stocks in the S&P 500 Index. Even utility stocks, long considered a good source of income, fall short when compared with REITs. Right now, the yield on stocks in the S&P Utilities index is 5.2%.
Diversification. Owning REITs could cushion your portfolio if the stock market falls. Studies show that REITs don’t track the stock market, particularly during sharp declines. When the S&P 500 index dropped 4.4% in July, REITs edged up 0.2%. That doesn’t mean you’re completely insulated. If the stock market crashes, your REIT share probably will fall, too. But they might not fall as much.
Liquidity. People have been investing in real estate for centuries, and some have been richly rewarded. But until recently, real estate was a high-stakes game. For every wealthy real estate maven, there were dozens of investors stuck with empty buildings nobody wanted to buy. If you invest in a REIT, you could still lose money, but you should be able to sell your shares. “REITs offer the opportunity to invest in real state the same way investors have invested in other publicly traded industries,” says Mark Decker, president of the National Association of Real Estate Investment Trusts. “While owning real estate is as old as Moses, owning it in a liquid security is a very new concept.”
REIT mutual funds zoom
If the idea of investing in office parks and factory outlet stores still gives you pause, consider investing in a REIT mutual fund. The past two years, mutual fund companies have launched dozens of funds that own REIT stocks. There’s even one for indexes: Vanguard introduced a REIT index fund last year. The main advantage REIT funds offer over individual REIT stocks is greater diversification, says Jim Shambo, a financial planner with Lifetime Planning Concepts in Colorado Springs. While individual REITs tend to focus on one sector, such as apartment buildings or hotels, REIT funds offer a cross-section of sectors in several areas around the country, he says.
David Lerner, president of David Lerner Associates, a regional brokerage firm, says, “The nature of the REIT is that you’re getting diversification, and you’re getting professional management.”
FRIDAY, MARCH 7,1997 Back to David Lerner News
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