 nytimes.com
By J. ALEX TARQUINIO
FUND investors who bet on real estate five years ago have been sitting pretty. The category has returned 18.8 percent a year, on average, over the five years through September, according to Morningstar. But that very success is starting to give some investors the jitters.
Real estate is also among the top Morningstar fund categories this year, returning 26.5 percent in the 12 months through September. Still, month-to-month returns have been all over the map, and some analysts worry that this may signal a peak. The 58 real estate funds tracked by Morningstar lost 7.5 percent, on average, in January, but then bounced back. Then, in August, the funds lost 3.5 percent, and in September they were up slightly, on average.
Real estate funds have been resilient because there has not been a spike in long-term interest rates, which can prompt a sell-off in all types of real estate investments, said Dan McNeela, a fund analyst at Morningstar. "But just because that hasn't happened yet doesn't mean that it won't happen," he said, and many economists predict rising rates.
Housing prices cooled over the summer in some local markets. A report by Prudential Douglas Elliman, a real estate firm, showed that the average price of a Manhattan apartment dropped more than 10 percent in the third quarter - to $1.15 million.
Real estate investment trusts, or REIT's, have been the traditional hunting ground for most real estate fund managers. REIT's are required by law to pay 90 percent of their taxable income as dividends. But three real estate funds with good long-term performance are run by managers who don't focus on REIT's.
Shares of home-building companies were the largest group in the CGM Realty fund from 2002 to 2004. Because they are not REIT's, these companies are not required to pay dividends - but soaring share prices more than compensated the fund's investors for that. The fund's average annual return over those three years was 38.6 percent.
But G. Kenneth Heebner, the fund's manager, switched course earlier this year. He said he did so "not because I don't like the companies, but because home prices have been inflated by reckless speculation." He also said that lending standards for home buyers had become too lax, which could lead to more foreclosures.
The home construction industry has boomed in recent years, as historically low mortgage rates have permitted more Americans to buy homes - and to pay more for them. Although the share prices of home builders have soared, their earnings have kept pace, so their price-to-earnings ratios are still relatively low. But Mr. Heebner said that he did not think that low price-to-earnings ratios would be enough to shield investors if home prices fell.
Mr. Heebner readily acknowledges that he interprets real estate investing broadly. His mandate permits him to invest in mining stocks, because they own either land or the mineral rights to land. So earlier this year - while he was selling all of the CGM fund's shares in home builders - he was loading up on coal stocks, which now make up about 18 percent of the portfolio. Arch Coal and Consol Energy are among Mr. Heebner's largest coal holdings.
CGM Realty returned 44.8 percent in the 12 months through September, largely because of its stake in coal. |
