Real Estate Is Still a Real Value
By REUTERS
Published: August 26, 2006
Filed at 10:12 a.m. ET
WASHINGTON (Reuters) - Real estate is expensive these days, but it's still a valuable commodity.
When you tuck a real estate trust or mutual fund in your investment portfolio, it will reward you with steadier and better returns than if you limited yourself to stocks and bonds.
Real estate goes up in spurts, like over the last five years, when the average annual increase was almost 21 percent, according to data from the National Association of Real Estate Investment Trusts and FTSE, a British index publishing company. And so far this year, real estate mutual funds have returned 16.57 percent to investors, reports Morningstar, putting them at the top of the fund research firm's list.
But even when real estate stocks and funds aren't racing up in price, they tend to pay you in solid dividends that are really rent payments collected by the companies you invested in. Even after the last rip-roaring five years, REITs are paying about 4 percent in dividends, according to their trade association.
The challenge for investors, after a big booming market, is how to build a bit of real estate into their portfolios without doing it at the absolute wrong time and in the wrong way. Here are a few pointers.
-- Don't buy another house and think you are diversifying. A second home is a lovely thing to enjoy with family and friends -- and might even make you money over the long term -- but it's not very diversified or liquid.
For investing purposes, you are probably better off with a diversified real estate investment trust, or a mutual fund or exchange-traded fund that owns commercial or retail property.
Most experts see the single-family housing market as softening now, but that's not necessarily true of commercial property. ``There is very little correlation that I've ever seen between residential real estate and commercial real estate,'' says Don Wood, CEO of Federal Realty Investment Trust, one of the most successful long-term REITs.
-- Real estate is expensive now, so don't overdo it. ``It should be a small percentage of a very well-diversified portfolio,'' says David Lee, who manages the T. Rowe Price Real Estate Fund, a Morningstar favorite.
Financial advisers typically tell their clients to keep no more than 5 percent to 10 percent of a diversified portfolio in real estate.
Investors who have been holding real estate for years might be in a position to trim their holdings now, if big gains have made them a larger part of the portfolio.
But if you don't hold any real estate, it's not too late to buy. ``It looks expensive, but by private market valuations, (REITs) look very reasonably priced,'' Lee says. Rents and property values have continued to rise, keeping their valuations within reason, he suggests.
-- Put real estate in its place. The worst thing about REITs and the funds that hold them is this: Their payouts don't qualify for the low 15 percent tax that applies to most stock dividends. So you're better off tucking your real estate investments into your 401(k) or tax-favored Individual Retirement Account.
-- Learn about the space. All real estate is not alike.
Some REITS specialize in office parks, others in shopping malls and still others in industrial properties. Some, like Wood's Federal Realty, focus on properties they can hold forever and make their money in rents. Others look to buy properties they can develop and sell for a quick profit. Some don't buy property at all; they buy mortgages, but those REITs don't have the same diversifying powers -- or the same outsized returns -- as the ones that buy actual buildings and land.
You can learn about REITs at nareit.com , investinreits.com and reitnet.com , as well as at most other online investing sites. (You can also rank all real estate companies on the Reuters Web site at investor.reuters.com .) You can compare real-estate holding mutual funds at morningstar.com.
Look for the usual qualifications. A fund should have above-average returns and below-average fees for its category. A REIT should show steadily increasing dividends, strong and growing earnings, and a reasonable price-earnings ratio.
-- Think international. Many REITs now buy foreign properties, and foreign-based REITs are also represented in U.S. markets. Managers who have a world to shop in can find great deals even when prices are high in the United States. (Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com.)
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