Real-Estate Funds Are for Real in the '90S

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The increasing popularity of real-estate funds is "the rags-to-riches story of the 1990s," says Jason Windawi, an analyst at Morningstar Inc.

The number of real-estate funds has increased to 22 funds with more than $1.5 billion in assets from five funds with about $80 million in assets in 1990.

"It might be natural to see this as just another sector-fund fad," Windawi wrote in a research report. "After all, biotechnology funds followed a similar path, booming in assets after that industry's spectacular 1991 gains, only to bust with the specter of health-care reform.

"So, too, did environmental and - most recently - Latin America funds."

But it would be a mistake to include real-estate funds in the sector group, Windawi said.

That's because, unlike typical sector funds, which feature industries or regions peripheral to the world economy, real-estate funds offer investors a way to participate in one of the world's largest asset classes, he said.

"The fund industry is giving its own signal that real-estate funds are for real," Windawi said.

Companies like John Hancock Mutual Funds and Invesco Funds Group Inc. that usually market sector funds don't offer real-estate funds, Windawi said.

Instead, firms like Capital Growth Management L.P. and Crabbe Huson Group are sponsoring real-estate funds. These companies aren't known for selling new funds unless they see "a serious investment with long-term potential," he said.

The real-estate industry is emerging from its worst bear market in decades, Windawi said. New construction and development has been low since 1990.

Meantime, the U.S. economy is improving, helping to absorb some of the excess capacity of the 1980s. The combination is producing an increase in occupancy rates and property values, he said. …