Views Differ on Real Estate Investment Trusts

Article excerpt

By Jeanne B. Pinder

N.Y. Times News Service

Many real estate investment trusts are providing the kind of returns that would catch any investor's attention. But should every investor buy?

One expert who says yes is Gregory J. Whyte, first vice president at Dean Witter Reynolds, a leader in real estate investment trusts, which are a kind of mutual fund that buys real estate or mortgages, converts them into securities and passes any profit on to investors.

"These are great investments for individual investors," Whyte said. "I'm called every day by people asking, `What should I buy for widows and orphans?' My response is, `Don't buy one, buy two or three _ diversify.' But I do think you want to buy quality."

One expert who takes a different approach is John Fosheim of Green Street Advisors, a Newport Beach, Calif., firm that analyzes real estate trusts. If an investor asks about individual real estate investment trusts, which are traded like stocks, Fosheim said: "I would tell them not to, but the reason is not that I don't like REITs (real estate investment trusts). When individual investors call here, we tell them, `Listen, this thing is fraught with danger.' Most individual investors get too focused on the wrong thing _ the dividend _ and don't ask the right questions, about interest rates and cash flows and management. Our suggestion to individual investors who want to buy a REIT is always the same: Go buy a low-cost mutual fund and let the experts do it for you."

A primary factor in the popularity of real estate investment trusts is their returns. Publicly traded ones had an average total return of 19.11 percent in the first quarter, said the National Association of Real Estate Investment Trusts, an industry group based in Washington, compared with a 4.28 percent total return on the Standard Poor's index of 500 stocks. In the second quarter, all publicly traded real estate investment trusts had a negative return of 2.8 percent, compared with a 0.5 percent gain for the S P 500.

While it is unwise to generalize about a sag in real estate investment trust fortunes from such sketchy figures, many real estate experts say that a lot of smart money bought real estate investment trust stocks in the last two years, and that bargains and opportunities are now a lot harder to come by.

There are ample reasons for investor caution. The trusts have been around since 1960, and they have a record of booms and crashes _ including a memorable crash in the early 1970s that burned a lot of investors. Even more important, not all real estate investment trusts are stars. For example, apartments are among the best real estate investments right now, but office buildings are generally considered a less desirable investment because of the glut of office space.

It also pays to remember the history of the real estate industry. The crash in values that followed the boom of the 1980s shocked traditional lenders, and most of them have stopped or sharply reduced their lending for real estate. …