REITs Rule…at Least for Now

“Mirror, Mirror on the Wall…Whose the Fairest of Them All?”

Well for the moment, real estate investment trusts (REITs) are, by a wide margin.

As the chart which follows indicates, REITs are outdistancing the competition, providing returns in the low double digits while the balance of the equity markets are showing losses in the mid-to-low single digits.

DJIA(1): -2.66% 
S & P 500(2): -4.53%
NASDAQ(3): -5.09%
Russell 2000(4): -2.73%
NAREIT Equity Index(5): +14.00%

(1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe. (5) NAREIT REIT Index

Obvious question: what gives? Why are REITs so seemingly attractive? Among the reasons, in no particular order, is the principal of anticipation; investors know that real estate is not overbuilt – it’s just “under-demanded, which will be self-correcting as the economy improves. Investors, anticipating a recovery in industry fundamentals want to be owners of shares rather than spectators trying to time the bottom of the market, which, by the way, no one rings a bell to signify. Next, REITs provide attractive dividends (3.89% as of August 31, 2010) while you’re waiting for fundamentals to improve. (For those looking purely for yield, REIT preferred shares are worth looking at). The REIT industry is well capitalized, disciplined, and patient, waiting for accretive value-added and opportunistic plays to come into their sights. Lastly, their access to capital to fund their business strategies at attractive pricing via the public equity and debt capital markets continues.

Top sectors based on total return: multifamily residential, +28.52%; free standing retail, +24.57%; self-storage, +21.69%; regional malls, +17.75%; and diversified., +16.54%.