Where Real Estate Is Rocking Again: REIT ETFs

Shopping mallAmid all the whining about residential and commercial real estate markets, exchange-traded funds (ETFs) comprising real estate investment trusts (REITs) have quietly been kicking butt.

"REIT ETFs are leading the S&P by a healthy margin, outperforming the S&P over the last 12 months," says Timothy Strauts, an ETF analyst for Morningstar, who covers REIT ETFs.

The category, U.S. ETF Real Estate was up 22% year-to-date through Sept. 21, compared to 3.71% for the the S&P 500 stock index, according to Morningstar. Last week, Vanguard REIT ETF (VNQ) traded near a new 52-week high of $54.85.

"REIT ETFs and REIT mutual funds have put together a remarkable track record on both a year-to-date and one-year basis," says Mark Ward, chairman of the Investment Policy Committee at Lucien, Stirling & Gray Advisory Group.

The Attractions of REITs


Wondering what a REIT is? It's a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate -- shopping malls, for example -- or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.

Why are they attractive? "Tax efficiency, liquidity, compound interest. If you don't have $140,000 to buy that condo and start renting it out, you can find a REIT ETF starting probably at $50," says Ty Young, president of wealth management firm Ty J. Young. They also provide a "short" option for investors. And their requirement to spend 95% of revenue as a dividend, is another attraction. "With a lot of cash on hand, they represent a strong investment vehicle," Young adds.

Back From the Abyss

During the financial crisis real estate went through a severe devaluation, and real estate ETFs felt the pain. "Most REIT ETFs lost more than 60% of their value during this period," says Jeffrey Rogers, president and chief operating officer of Integra Realty Resources. As the U.S. economy has improved, real estate values have stopped their free fall and are close to equilibrium, says Rogers. As these underlying commercial real estate securities began to recover, so did the REIT ETFs.

So, the fact that REIT ETFs are faring so well isn't surprising to some, "given what transpired over the last three years and the now-known root causes of this financial upset," says Ward. "It appears on the surface that since the underlying cause of this crash came from real esate, a mirror recovery in REITs came a little later as investors waited a little longer to tiptoe back into them, as it wasn't apparent to the usually more conservative REIT investor that the recession was ending."

He adds: "Now that it is clear that while things are still tough all over, the worst-case scenario has yet to pan out, causing the markets to bid the prices on securities and REITs back to more reasonable levels."

Hardly Risk-Free

Once investors realized the world wasn't ending, those looking for higher income sought out REITs, explains Morningstar's Strauts, who adds that REIT ETFs are paying about 3.5% yields, compared to around 1.7% from companies in the S&P 500.

A few years back, REITs had a lot of debt on their books, and when the credit crunch happened, they weren't able to refinance. But as the credit markets opened up again, they've been able to refinance at favorable terms, which helped strengthen them, says Strauts. They've also been raising cash.

Despite REITs' recent standout performance, however, they're not without risks. "The biggest risk with REITs is always going to be the stability of the underlying rents on the properties owned by the trusts. So long as those renters continue to pay their rents and someone is always in line to take on or renew the leases as they expire, then the REITs should remain stable," explains Ward of Lucien, Stirling & Gray. "However, if the commercial side of the market begins to weaken, then that should over time begin to weaken the yields further, to the point that shareholders no longer find value and sell their shares."

Then too, says Strauts, "If the economy moves to a double dip, then real estate will dip. But if the economy trudges along, then real estate will be OK."

In a recent article on TheStreet.com, Don Dion summed up the market for investors: "While I feel particularly more optimistic toward REITs, I expect choppy performance to come from all areas of the real estate market. Therefore, investors should prepare themselves for the possibility of seeing swings both lower and higher as we continue along the road to recovery."

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stoellergirl

I agree REITs can be great investments. Is a REIT-ETF a public REIT compared to a private REIT like a Cole (http://colecapital.com/) REIT? I can’t determine if one is better than the other.

January 10 2011 at 12:14 PM Report abuse rate up rate down Reply
PF1714

"And their requirement to spend 95% of revenue as a dividend, is another attraction." I think this should read "90% of income is required to be distributed as a dividend". Not revenue and not 95%.

September 29 2010 at 7:10 AM Report abuse rate up rate down Reply
mikfete58

"IF the economy moves to a double dip, then real estate will dip." NO KIDDING! Commercial real estate is about to crash due to vacancies (look at strip malls, shopping malls, major routes with closed up stores in NEWLY BUILT buildings eveywhere across America). There is no double dip. This is a real DEPRESSION. Warren Buffet, stated on 9/13 that he "ruled out double-dip recession"and on 9/23 Warren Buffett stated "We're still in a recession". Which is it? President Obama quoted the National Burea of Economy as stating "the recession ended in June 2009". Then why did we need a stimulus package of over 1 trillion dollars (with no interest!)? This just created a huge bubble, like the prior mortgage bubble, but this one will burst this year and will go hand in hand with t5he commercial real estate crash. WE ARE IN A DEPRESSION PEOPLE! US poverty rate up as 44 million live below povrty line, and that was from the 2009 census! With hundreds of thousands more people out of work, this has only gotten worse in 2010. GREAT DEPRESSION 2 is underway. Buckle up, as we're ALL going over the falls together in this one!!!!

September 29 2010 at 2:28 AM Report abuse +2 rate up rate down Reply
Penny Jim

WEll! Well! And so real estate which was once was a great investment is now a very iffy thing. With the agenda in Washington DC set on social programs we could see 5 or more years of poor real estate sales and the commercial real estate market could see a really big drop in performance.

September 28 2010 at 11:03 PM Report abuse +3 rate up rate down Reply
savemycntry911

Thanks AOL, for making these boards so boring they put us to sleep.

September 28 2010 at 8:59 PM Report abuse +2 rate up rate down Reply
savemycntry911

gardeningatnight is in the dark.

September 28 2010 at 8:46 PM Report abuse +1 rate up rate down Reply
ronsjigslures123

You go around any city in the USA these days and huge buildings city blocks long are in sheriffs sale or default of loans or what ever, houses are empty by the city blocks long all over the place. Citys can,t rent office space out or store space.. Then you have to ask the question why is this that OTHER countrys are not FLOCKING to the USA to buy up all this stuff cheap ... BECAUSE ITS A BAD INVESTMENT other wise countrys would be buying up the whole USA .. like they did 30 years ago. If the overseas investors thought it would be a good long term investment they would be buying all they can get there hands on.

September 28 2010 at 8:21 PM Report abuse +8 rate up rate down Reply
ronsjigslures123

Let these fools buy up properts, houses, and buildings .. i hope these people spend all there money on this stuff because they will loose it all or go in the hole holding this stuff. A lot of these people don,t know where to put there money so they will buy stupid investments and loose big time. This recession is no where out of the woods yet and will not be for many years to come. People are scrambling to invest money, and the con artists are all out there picking there BONES CLEAN, it will deserve them right look what these people did to the working people. CARMA is real what comes around goes around.

September 28 2010 at 8:10 PM Report abuse +4 rate up rate down Reply
telebob52

libs abound..hi garden,,those heavy miles vehicles can become problamatic...85 and change should still go another hundred with minor issues..

September 28 2010 at 7:56 PM Report abuse rate up rate down Reply
mobnana

this whole artical is BS. The big investment houses are at it again with Fannie and Freddey gambling with thin air! Go buy their stock and see what you get --- deeper and deeper in losses! I loved the early 60ths when small local banks were run buy local investors and savers, and you were known by the bank by your name! We didn't have these stupid credit scores, credit cards, and other junk loan agreements ----- you had a job, you saved for the 20% downpayment, you talked directly to the bank that knew you and your family, and then you bought only what you could afford. And you lived very well! The goverment, the banks, and wall street are picking the pockets of the middle class dry. Term limits, flat tax nationwide, and brakeup of this investment houses is the only way to recover the American dream!!! Vote in November

September 28 2010 at 7:54 PM Report abuse +4 rate up rate down Reply