Real Estate Investment Trusts Grow in Popularity
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 investing.
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 commercial properties.
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. …