The real estate slump has caused many homeowners to rue the
day they bought a single-family residence, but investors in many
Real Estate Investment Trusts _ better known as REITs _ are
raking in profits and converting many newcomers to their way of
Everyone from individual investors to pension and mutual fund
managers are now looking at REITs, industry experts say. And the
millions in new capital that these investors promise to dump into
the REIT market is another reason why the future seems rosy.
What's making REITs so popular?
While real estate prices plunged in many parts of the country,
returns on REITs have been putting traditionally higher-yielding
investments to shame. The Standard Poor's 500, a key stock
market index, posted an average annual return of less than 8
percent last year, for example. At the same time, REITs posted an
average return of 12.2 percent.
And during the first four months of 1993, REIT prices have
soared by nearly 14 percent overall, says Christopher Lucas,
director of research at the National Association of Real Estate
Investment Trusts. For the 12 months ended April 30, returns
reached 26.2 percent compared to 9.2 percent in the like 12-month
period the year before, Lucas adds. Few expect that rapid rate of
growth to continue throughout 1993, but another year of
double-digit returns seems nearly inevitable, some say.
"REITs have had a phenomenal run," said Richard Wollack,
chairman of the Liquidity Fund in Oakland, Calif. "The past
couple of years, and particularly the past couple of quarters,
have been dynamite. Can this go on forever? If there are no
fundamental changes in the economy, yes."
Ironically, while some people expect all real estate
investments to suffer when prices fall, one of the things that's
making REITs soar is depressed real estate prices.
REITs, which are structured somewhat like closed-end mutual
funds, are publicly-traded investment companies that pour their
cash into shopping centers, medical buildings and mortgages on
After they're launched through public stock offerings, their
shares usually trade on major U.S. stock exchanges and are bought
and sold through stockbrokers.
Their share prices are a function of both asset value,
dividend yields and future expectations. Dividend yields
typically come from the profits the REIT makes by renting out _
and sometimes selling _ properties in their portfolio.
When property prices and financing costs are low, as they are
today, REIT dividends can get decidedly rich. That's because a
well-managed REIT can get more in rent than it's paying in
holding and management costs for many properties. On average,
REITs are paying upward of 6 percent in annual dividends _ about
twice what you could earn on a money market fund.
But REITs are also benefiting because many experts say they
believe that real estate prices have hit bottom in many parts of
the country. …