REIT: Another four-letter word or a golden opportunity?

Why has REIT become a four letter word?  One reason is that REITs — professionally managed portfolios of real estate holdings – have had a great deal of negative press due to the high level of foreclosures and other distressed property sales. But the reality is that REITs are taking advantage of today’s lower values in the real estate market and in 2010 are already showing strong returns.  REITs offer an opportunity for investors to add a new asset class to their portfolios. First, REITs traditionally have a very low correlation to conventional assets like stocks and bonds and typically have gone up during stock downturns. Second, REITs have historically been a hedge against inflation. Lastly, REITs pay an income stream and are required by law to distribute at least 90 percent of their annual taxable income to shareholders.

Of course, REITs still involve risks associated with real estate, such as property value fluctuations, lack of liquidity, limited diversification and sensitivity to the economy.  There are also some good reasons to invest in the shares of a REIT versus investing directly in a specified property. The most important is diversification, which reduces a number of risk factors. For example, if you own an income-producing property in South Florida — individually or with partners — you live and die by the local economy.

A slowdown in retail sales may increase shopping center vacancies. A downturn in jobs means less demand for rental apartments. And a powerful hurricane could put your entire real estate investment at risk. That’s not the case with a REIT, whose holdings might include properties in New York, Wichita, Montreal or Sydney — almost anywhere in the world.  REITs may provide an investor with greater flexibility and liquidity. Because they typically specialize in one type of property — offices, apartments, retail, hotel, healthcare, self storage — an investor can change investment strategies based on market conditions. Also, it’s much easier and faster to sell shares in a REIT than to try and unload an apartment building that’s not doing well. You don’t have to deal with real estate brokers, agents, appraisals, mortgage lenders or closings.

Because REITs are professionally managed, they usually do a good job of picking out the diamonds hidden away in their chosen markets. And there is one more benefit — the low cost of entry. An investor can purchase 100 or 500 or 1,000 shares of a REIT for far less than buying a commercial or residential property, and without the complexity of contracts, lawyers and property management companies.  Currently, there are about 125 REITs listed on the New York Stock Exchange, providing a wide variety of investment styles and strategies for investors. The REIT rebound over the past 18 months has allowed many funds to build up their capital reserves and purchase distressed properties at low prices. With a modest injection of funds for renovation, these properties could be repositioned to attract higher quality tenants, potentially adding significant value over the next few years.

With the uncertain state of the nation’s economic recovery, it’s hard to forecast how well REITs will perform for the rest of 2010. But a slow improvement in the economy should result in more stable property values and a decline in vacancy rates, which presents a buying opportunity over the long term. While stocks have historically been a leading economic indicator, real estate is often a lagging economic indicator. In the office market, for instance, unemployment rates would typically drop before demand for space picks up. In retail, consumer confidence and spending usually rise in advance of shopping center leasing activity.  With their advantages of liquidity, flexibility and diversification, REITs can fit nicely into almost any investor’s portfolio. Even though the unprecedented rise in real estate we experienced from 2000 to 2005 will most likely not happen again in our lifetimes, REITs remain a solid long-term play. If you’re a prudent investor, this could be the right time to consider adding REITs to an investment portfolio.  Click here for full report from the Miami Herald….