Skip navigation
Watchlist Sponsored By :

Current DateTime: 02:50:31 04 Jul 2009
LinksList Documentid: 24355697
  • Collection of Michael Jackson

      Earlier this year, Jackson sought to auction his personal items. Although it never came through, here's a look at what was almost sold.

  • Recession-Resistant US Cities

      Some cities have been hit much harder than others during the recession. Here are the metro areas faring the best.

  • How Much For A T-Bone Steak?

      From the cost of a T-bone steak to a monthly phone bill, the price for everyday items can vary dramatically across the country.


Current DateTime: 02:50:31 04 Jul 2009
LinksList Documentid: 24890560
  • Boom, Bust and Blame

      The inside story of the economic crisis that has gripped the entire world.

  • E3: Gaming's Cutting Edge

      North America's premier computer and video game trade show draws tens of thousands of professionals to experience the future of interactive entertainment.

  • The Fall of GM

      A look into the fall of General Motors as the automaker heads toward bankruptcy and an effective nationalization.

By: Jeff Cox, , Special to CNBC.com | 06 Mar 2008 | 12:17 PM ET
Text Size

Even though real estate itself remains a taboo phrase in the investment community, real estate investment trusts continue to do quite nicely, thank you.

Of course REITs aren't quite the same as going out and buying a property yourself and hoping the value grows. Instead, they use pooled investor money to manage income-generating property and mortgages. 

And returns have continued to come along well, despite the problems in the overall real estate industry. REITs benefitted greatly during the real estate boom of recent years, as well as the Federal Reserve's aggressive interest rate-cutting over the past six months.

The Morgan Stanley REIT Index, while down 4.17 percent so far this year, has still outperfomrmed many of the major stock indices. In the past three years, the REIT index has a return of 8.9 percent, compared to 3.4 percent for the Standard & Poor's 500 index and 4.44 percent for the Dow Jones Industrial Average.

"REITs are a wonderful asset class to have in a portfolio because their long-term returns are the highest of the major asset classes if you go back to their origination in 1962," says John Merrill, chief investment officer at Tanglewood Capital Management in Houston. "Yet they have a more modest risk. From a risk-return standpoint they've just been an outstanding asset class."

Spring Real Estate Guide
Part of what makes REITs so attractive is indeed, as Merrill notes, the low level of risk they offer because of their diversified makeup in what has become a volatile real estate market. Another reason, though, is that while residential real estate prices have slumped on a national level, the commercial side continues to thrive.

In particular, REIT's weighted with apartment building holdings are doing especially well as more and more people opt to rent than buy while real estate prices fall.

"Given that people still can't afford to buy and the real estate market is basically on hold, people are going to rent and wait it out," says Michael Cohn, of Atlantis Asset Management. "That bodes very well for the apartment REITs."

Not everyone, hoever, is sold on REITs. Chris Mayer, managing editor at Capital & Crisis, warns of yields that are gravitating towards those paid by lower-risk Treasury notes and believes companies like Brookfield Asset Management [BAM  Loading...      ()   ] are better in this climate because they are guaranteed a return in fees for the assets they manage.

Many analysts remain bullish about REITs, despite signs of a softening commercial real estate market

Apartments, Offices in Vogue

Cohn recommends Apartment Investment Management [AIV  Loading...      ()   ] and Colonial Properties [CLP  Loading...      ()   ], two apartment building-oriented REITs that could be undervalued. Colonial has bounced off its 12-month low hit in early January and gained 21 percent since then.

"What you have to do is to be selective in the market," he says. "I would stay away from things like the mall REITs and the ones that are dependent on consumer spending."

Mike Watts, senior vice president at JF McKinney, is looking at office REITs now, and advocates a geographically diverse strategy. "My thoughts are that REITs are a good investment vehicle, but they're not passive vehicles," says Watts.

Most analysts favor long-term investments rather than shuffling money in an out as the market vacillates. Like the broader stock market, REIT analysts also endorse larger-cap funds with stability.

That means companies like ProLogis [PLD  Loading...      ()   ], AMB Property [AMB  Loading...      ()   ] and Boston Properties [BXP  Loading...      ()   ] outside the residential space, and apartment REITs like BRE Properties [BRE  Loading...      ()   ] and Avalon Bay [AVB  Loading...      ()   ], according to Anatole Pevnen, editor of REITcafe.com.

Pevnen's site compiles a volatility index that shows REITs have had a higher volatility level than stocks over recent weeks, which translates to risks for buyers looking only at the short term.

"When you look at REITs the timing is very important. If your investment horizon is the next three to six months it's questionable as to whether now is a good time," Pevnen said. "If your investment horizon is five to ten years there's usually not a bad time. You have to look at where you are in that time span."

Mayer's strategy is to play it safer with the asset managers, and he lists Jones Lang LaSalle [JLL  Loading...      ()   ] and Brookfield Asset Management [BAM  Loading...      ()   ] as his favorites.

He also dislikes REITs because of the high dividends they must pay to investors -- 90 percent of taxable profits.

"They have to continue to go back to the market and raise capital because they have to pay out most of their dividends," Mayer said. "It's not a good time to have to raise capital."

© 2009 CNBC.com
Tools:
Print EmailAdd This share icon


Current DateTime: 01:05:22 04 Jul 2009
LinksList Documentid: 29778428

Current DateTime: 01:05:56 04 Jul 2009
LinksList Documentid: 29779196

Current DateTime: 01:06:39 04 Jul 2009
LinksList Documentid: 29779199

Current DateTime: 01:06:39 04 Jul 2009
LinksList Documentid: 29779198
CNBCCNBC
About CNBC  |  Site Map  |  Privacy Policy  |  Terms of Service  |  Video Reprints  |  Advertise  |  Help  |  Contact
Partners: AOL Money  |  BloggingStocks.com
CNBC is a Division of NBC Universal
  Data is a real-time snapshot *Data is delayed at least 15 minutes
Global Business and Financial News, Stock Quotes, and Market Data and Analysis

© 2009 CNBC, Inc.  All Rights Reserved.
Thomson ReutersThomson Reuters