How to buy real estate investment trusts
BOSTON — It "makes some sense" for any diversified investment portfolio to have some money "tied to real estate cash flows," says Steven Wechsler.
Mr. Wechsler is hardly an unbiased source. He is president of the National Association of Real Estate Investment Trusts (NAREIT), the Washington trade organization for the nation's 211 REITs.
But many brokerage-house analysts agree. And they suspect REIT shares will recover this year after a sharp price "correction" last year when legislation moved through Congress that removed special tax advantages for a few REITs, including Starwood Hotels & Resorts.
Many investors thought the whole industry would be damaged, says Paul Reeder, an expert at SNL Securities, an information firm. There was "confusion."
Over time, REIT shares have proved to be a conservative, solid investment. Their compound annual return has been 10.26 percent in the past three years; 8.82 percent over 10 years, and 12.25 percent over 20 years, according to NAREIT.
So how does one invest in REITs?
"Mutual funds might be the way to go for most investors, rather than through individual stocks," says Mr. Reeder.
That's because mutual funds provide investors with a diversified REIT investment. A fund will likely have some 30 or so different REIT stocks in its portfolio.
There are 46 REIT fund managers listed with telephone numbers on the industry's Web site: www.nareit.com. Mutual-fund researchers at Morningstar Inc. (www.morningstar.net) monitor the performance of more than 80 REIT funds.
Most major mutual-fund management firms include a fund that invests in REITs.
Brokers also will sell you REIT mutual funds, often those with a sales charge attached that they will share with their firm.
You can also invest directly in the shares of an individual REIT, but that requires studying the characteristics and performance of a REIT stock.
REITs specialize in a variety of commercial buildings, including office buildings, shopping centers, apartment buildings, and other types of real estate.
Some points to consider: Is a REIT invested primarily in property in one area of the country? Is it an equity REIT, investing in actual real estate, as almost all do? Or is it a REIT that invests in real estate mortgages? Or a "hybrid" that invests in real estate and mortgages?
Most REIT shares are traded on the New York Stock Exchange. But some are listed on the NASDAQ National Market System or the American Stock Exchange.
The NAREIT Web site lists dozens of analysts at brokerage houses or elsewhere who track the industry and individual firms.
It also provides investors with a "real-time" index for the entire 211 REIT shares, weighted according to their size (capitalization). It lags behind the actual trading market by only two minutes.
And the index provides historical statistics and information on total returns, price returns, and dividend yields. Investors can then compare the performance of an individual REIT against that of the industry as a whole.
Despite cheery analyst forecasts, so far this year, the REIT shares index is down more than 2 percent.
One boost to REIT shares may come from abroad. A recent survey of foreign investors in US real estate by the Association of Foreign Investors in Real Estate (AFIRE) in Washington found that 42 percent said they would increase their investment in the US this year, some through REITs.
Some 27 percent of respondents, more than twice as many as a year earlier, rated the opportunities in US real estate as better than the year before.
AFIRE members own $22 billion in US real estate. That is about two-thirds of total foreign investment in American real estate.