Real Estate Investment Trusts gaining ground on Wall Street

By James M. Woodard
Copley News Service

Dollars are moving away from stocks and bonds in today's economy because families are learning that the same forces driving up the value of their homes make real estate a better investment.

One easy and secure way to invest in real estate is to buy shares of a Real Estate Investment Trust. REITs buy, lease and sell apartment complexes, condominium developments, office buildings, shopping centers and other commercial properties.

The strong response to a recent column focusing on REITs shows there are a number of people interested in getting more information about this increasingly popular form of investment.

In less than four years, REIT share prices have climbed about 31 percent, says the National Association of Real Estate Investment Trusts. How does that compare that to your stock profits over the same time?

Many investors are weighing whether to invest directly in real properties or to buy shares of a REIT. A study by Ibbotson Associates indicates that a combination can make sound investment sense.

"The study found that REITs and direct real estate have similar, though not identical, long-term investment characteristic," said Steven Wechsler, the president of National Association of Real Estate Trusts. Annual returns for a 15-year period were as much as 0.27 percent higher in portfolios that included both REITs and direct real estate investments.

"There's a growing body of real estate research suggesting that direct real estate investments and publicly traded real estate securities perform well together as complementary investments. And there's compelling reasons for including both in an investment portfolio," said Michael Grupe, NAREIT senior vice president.

"The study's conclusions are clear. Real estate should be viewed as a core asset. Pension plans and other institutions have recognized this fact for many years and have capitalized on both direct real estate investments and REITs for dividends and diversification.

"Real estate stocks remain the best way for the average American to gain the same benefits as the big investors."

Q: When will the bubble burst in home values?

A: Probably not in the foreseeable future. Some people are still waiting for home values to plummet. With mortgage interest rates floating up and down, they think the stage is set for a major slide. That is unlikely, according to most real estate industry analysts.

The housing market might become sluggish when interest rates rise, but a crash is a long shot, according to RealEstateJounral.com, the Wall Street Journal's guide to property.

"Higher interest rates may put a crimp in the explosive growth in housing, but they are also a reflection of economic recovery," the report stated. "Growth in the housing market, both from new home sales and higher home prices, has helped underpin growth amid slower activity elsewhere in the economy."

Q: Is the Treasury Department getting more involved in the nation's real estate industry?

A: That's a possibility. But such a proposal by the Bush administration has sparked a controversy in the real estate industry. Seldom has there been such disagreement between the nation's leading associations.

The proposal would move oversight control of Fannie Mae and Freddie Mac, the two largest suppliers of mortgage funds, from the Department of Housing and Urban Development to the Department of Treasury and would include new program approval authority.

To illustrate the difference of opinion on this action, here's what John Courson, chairman of the Mortgage Bankers Association said in a press release:

"MBA supports the administration's proposal that the Department of the Treasury be given responsibility for safety and soundness regulation of Fannie Mae and Freddie Mac, and that Treasury should have approval authority over their programs and activities to ensure they are consistent with prudent financial management and sound business operation. Our members provide financing directly to borrowers in the primary mortgage market, and are keenly interested in maintaining the safety and soundness of the nation's real estate finance system."

Here's what Kent Conine, president of the National Association of Home Builders said about the proposal:

"Moving program approval authority for Fannie Mae and Freddie Mac to the Treasury constitutes an attack on the mission of HUD by disrupting the capacity of the two giant mortgage lenders to provide the liquidity and stability needed to keep mortgage credit available at the lowest possible cost to home owners and rental housing providers."

Q: Which is most likely to be successful, a big real estate firm or a small one?

A: To be a profitable real estate broker, it is best to be either a very large or very small firm. The companies in the middle are being increasingly squeezed for profits.

That's been evident for years, but it is even more obvious today when reviewing the 2003 Top Performing Companies Report, published by the real estate research firm Real Trends. The study provides bench marks for measuring performance of real estate brokerages. Denver-based Real Trends can be reached by telephone at (303) 741-1000.

Send inquiries to James M. Woodard, Copley News Service, P.O. Box 120190, San Diego, CA 92112-0190. Questions may be used in future columns; personal responses should not be expected.