REITs in 2011: Mistake or Opportunity?

Why REITs still have appeal


If you were invested in REITs (real estate investment trusts) this year, you may be wondering if you had your head on straight when you made that decision.

[See How to Avoid Making Costly Investing Mistakes.]

Historically, REITs have offered increased diversification, lower volatility, enhanced yields, and an opportunity to increase returns. But in 2011’s uncharacteristic market, REITs have fallen along with U.S equities, and as of the end of the third quarter, both were underwater, with the S&P 500 down 8.68 percent and the FTSE NAREIT All Equity REIT index down 6.05 percent.

Let’s start with the historical returns. On a calendar year basis, the only time in the last ten years that the All Equity REIT index and the S&P 500 ended the year down was in 2008, when both ended the year down about 37 percent.

[See How to Value the Stock Market.]

So what’s the rationale for the unexpected correlation in 2011? A lot of the same concerns of the global economy have found their way into REIT markets. The looming European and U.S. debt crises and the fear of a global economic slowdown are the main culprits. As one might imagine, the strength of the financial institutions and their ability to lend money to the REIT industry continues to have a direct impact on the growth or contraction of the industry. Credit is much more available in the U.S. today than it was in 2008, and the public markets have, to some degree, been opened. According to the National Association of Real Estate Investment Trusts (NAREIT), the amount of capital from public as well as secured and unsecured debt has approximately doubled since 2008 to a total of $43.4 billion so far in 2011. The fear still remains, though, that the crisis in Europe could spread and eventually freeze the U.S. mortgage markets again.

The year-to-date performance of the 160 sectors in the FTSE NAREIT All Equity Index varies greatly—from a 26.19 percent decrease in the Lodging/Resort sector to a 16.33 gain in the Manufactured Homes sector. The performance of your portfolio thus has a lot to do with the sectors you’re invested in. If you were in Multi-Family, Manufactured Homes, Self Storage, or Regional Malls, you probably fared pretty well. Any other sector and you may find yourself needing a breathing apparatus for some air.

So what’s an investor to do?  First, take the emotion out of the decision. Understand that the year-to-date numbers don’t tell the whole story. When you look back at a longer time frame and understand the importance of historical averages, you’ll see that REITs have provided a lower correlation with equities, thus providing increased diversification.

In my opinion, investing in REITs still makes sense. REITs add to the diversification of your portfolio and historically are considered a non-correlated asset. Also, owning REITs can potentially help increase portfolio income. On September 30, the cash dividend yield of the FTSE NAREIT All Equity index was 5.23 percent. Beyond that, REITs are currently considered inexpensive. Typically, REITs trade at a premium to their Net Asset Value (NAV), but as of October 5, REITs were trading at a 12 percent discount.

U.S. office rents climbed in the third quarter due to increased demand and a lack of new supply. This is great news following almost three years of declining rents. Office space is the largest part of the commercial real estate market. Add in the fact that the United States added 103,000 workers in September following a 57,000 increase in August, and you have the makings of a slow but recovering U.S. market.

So, if you take the long view, investing in REITs can be an effective way to help diversify your portfolio. And a well-diversified portfolio is one of the most effective ways to position yourself to pursue or work toward your goals for the future.

Timothy S. MicKey , CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @TimothySMickey, and on their Facebook page.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing in Real Estate Investment Trusts (REITs) involves special risks, such as potential illiquidity, and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

The Standard & Poor’s 500 index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of the companies.

The FTSE NAREIT is an unmanaged index that tracks the performance of all U.S. REITs.