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Real Estate Stocks Still Doing Well

- Alan Lavine and Gail Liberman

So what's the scoop on real estate investments?

Everyone keeps waiting for them to peter out. But real estate investments trusts (REITs) are performing well.

When you invest in a REIT, you are a stockholder in a company that makes money from leasing commercial, industrial and residential real estate. Over the past three years, real estate stock funds, which primarily invest in REITs, have grown at a 14 percent annual rate, according to Morningstar Inc., Chicago. By contrast, the S&P 500 has lost -11 percent per year over the same period.

This year, real estate stock funds are up about 20 percent, which is in line with the overall stock market.

Ken Gregory, editor of No-Load Fund Analyst, Orinda, Calif., says REITs continue to post strong positive performance.

"The fact that REITs have kept pace with the broader (stock) market during the recent rally has come as a surprise to some," he says. "The chief concern has been that REITs would be left behind when early cyclical stocks (economically sensitive stocks) rallied."

But investing in real estate is no sure thing. You could lose money over the short haul. Vacancy rates still are high. Earnings growth expectations of real estate companies are flat for the coming year. Plus, REITs' stock prices may be overvalued.

What about direct ownership of real estate? Research shows it is a good way to diversify your real estate investments.

A study by Ibbotson Associates, Chicago, shows that there are benefits to direct real estate investments along with owning real estate stocks. Its research found that REITs and direct real estate investing have similar, though not identical, long-term investment characteristics. And when you combine the two, you get a better return with less risk.

Using annual returns for a 15-year period from 1987 through 2000, Ibbotson determined that the returns of holdings that included both REITs and direct real estate investments were more than one-quarter-of-one percent higher. Plus, they were less volatile than holdings that included just stocks, bonds and cash. If you are going to invest in real estate stocks, it's best to stick with diversified real estate stock funds. The funds own a large number of issuers and are diversified geographically and by type of leasing deals. Best-rated real estate stock funds, according to Morningstar include Cohen & Steers Realty Shares, Fidelity Real Estate Investment, and Third Avenue Real Estate Value Fund.

The key to investing directly in real estate is location, location and location.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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