Real estate trusts still a good investment
October 19, 2006
Every day, I start the morn off by looking at trends and what continues to surprise me is the dominance of real estate investment trusts in the equities market for yet another year.
Here we have a seventh year of rising REITs with many real estate experts not willing to venture when the trend will end. Every time I think that REITs have run their course, I am proven wrong time and again.
So far this year, REITs have logged spectacular gains. Year to date through Sept. 30, the average REIT climbed 23.4 percent, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group.
Compare that with the S&P at 8.6 percent over the same period. The REIT rally has spread to many property sectors from the worst-performing manufactured homes REITs at 2.4 percent to apartment REITs at 34.1 percent YTD.
Other real-estate investments are not faring as well. Consider that the average homebuilder stock was down 27.3 percent YTD accord to Chicago based Mornstar Inc. So what gives?
There does not appear to be a very strong correlation between REIT prices and interest rates. Are REITs overvalued? Not if you look at their prices as a reflection of the underly value of their real estate portfolios.
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Another factor perhaps keeping REIT prices up is that investors love the juicy dividends which average around 4.6 percent. Compare that with the average dividend for a stock in the S&P at around 1.6 percent. Many investors are looking for a higher yield and with more baby boomers retiring every day, REITs may remain popular.
REITs have historically been able to raise their dividend each year since 1993 in excess of the rate of inflation according to REIT management kings Cohen and Steers Capital Management Inc. in New York. This is very attractive for investors look for rising income.
Will REITs continue to amaze? It is hard to say, but they continue to amaze me. And REITs are a great way to get the appreciation that the real estate market has to offer without the liquidity risk of owning the actual real estate. And besides, you never have to repaint or carpet a REIT.
If you would like to see if there is a REIT that is right for you, give my office a call at 841-4277.
• Carol Perry, a Northern Nevada resident since 1983, represents the firm of Wachovia Securities in Carson City.