Mutual funds : REITs a good bet

NEW YORK – If location is the golden rule of real estate, then many who invest in real estate mutual funds might at times feel as if they’ve stumbled upon a great deal in the fanciest building in town.

Known as real-estate investment trusts, or REITs, these companies have shown at times returns greater than 25 percent per year in recent years. REITs, which frequently invest in commercial real estate or larger residential projects such as apartment buildings, have dodged the financial wrecking ball that has left cracks in some parts of the housing market.

“More investors seem to find value every quarter and I would say it’s probably too early to announce a top to the real estate market,” said Jeff Tjornehoj, an analyst at Lipper Inc., which rates mutual funds.

And even if the gains shown by REITs and the funds that invest in them cool in the coming years, as many analysts expect, the foundation could be adequate to support solid, though perhaps slower, growth.

“I think people are concerned that real estate has done so well that it’s comparable to the tech bubble of the late ‘90s. I think this is a completely different animal,” Tjornehoj said. “They make money,” he said, offering up one contrast with many failed dot-coms. “They have a real residual value.”

REITs are unique in that they skirt most income taxes by paying out nearly all of their income to shareholders through dividends.

This has often made REITs, which began to draw widespread attention in the 1990s, desirable for investors seeking income. But now investors appear to be clamoring as much for the real estate.

“At this point people are investing for appreciation, not income,” Tjornehoj said.

Dionisio Meneses Jr., managing director at Charles Schwab, contends investors can benefit from those REITs that remain public and shouldn’t simply look to the sector based on a notion that more real estate companies will be taken private.

While many REITs focus on commercial properties, some stick to shopping malls, for example, or apartment complexes, so it’s important to understand the types of REITs a fund might invest in.

“Certainly, the apartment REITs did very well last year and I think there is some concern that perhaps this side of the market is a bit overheated,” Tjornehoj said.

“On the other hand, you have regional malls which have done very well and there aren’t any new regional malls coming out this year so the opportunities seem to be there.”

Differences in where the REITs put their money matter greatly. REITs that invest in manufactured homes appreciated 1.3 percent in January, while regional mall REITs surged 13 percent.

In general, investors should look at a fund’s overall diversification, Tjornehoj said. He is impressed by ProFunds’ Real Estate UltraSector ProFund. It has shown a five-year annualized return of 26.1 percent.