REITs - Real Estate Investment Trusts - Info & Discussion: Boom in Real-Estate Mrkt Fails to Boost REITS

» JenL_3 - Boom in Real-Estate Mrkt Fails to Boost REITS

This from 9/3 WSJ:

Boom in Real-Estate Market Fails to Boost REIT Stocks

By BARBARA MARTINEZ

The real-estate market continues to soar. Rents for all property types -- from office buildings to apartments -- are still rising at a healthy clip. Demand for space appears comfortably ahead of supply in most major markets.

So shares of real-estate investment trusts, the public entities that own a chunk of the nation's real estate, are flying, right?

Wrong.

The shares are now down 4.6% since the beginning of the year, compared with a 7.3% gain in the Standard & Poor's 500-stock index. Recently, the much-watched Morgan Stanley REIT Index fell below the psychologically important 300 level.

"There isn't much joy in REIT-ville these days," says David Sherman, analyst at Salomon Smith Barney. "The mood among REIT investors remains morose, or maybe comatose." The title of one of his recent REIT reports: ZZZZZ.

There was a glimmer of hope in April, when shares of REITs shot up (after having their worst performance in more than 20 years in 1998 with a share-price decline of 22%). Even famed value investor Warren Buffett started to buy up some REITs. From the beginning of April to nearly the end of May, REIT stocks climbed 14%. Since the peak in May, however, REIT stocks are down 8.2% on a total-return basis, which includes their hefty dividends.

Most analysts cite the threat of rising interest rates, distractions from glitzier stocks and the REIT industry's own undoing.

Interest-rate fears affect REITs with variable-rate debt, which would be squeezed if rates keep pushing upward. And investors are distracted by highflying technology stocks over REITs that offer only 8% to 10% growth rates.

"Whatever is going on has to do with the psychology of stock investors, not fundamental company performance," says Eric Hemel, analyst at Merrill Lynch. "Investors are not falling in love with these companies." REITs are expected to continue to turn in healthy earnings, though the level of earnings growth is "gradually tapering down," he says.

There is another possible culprit, and REITs themselves may be partly to blame. From May 1 through July 31, over $800 million in REIT equity offerings were priced, while dedicated REIT mutual funds received only $46.7 million in inflows, says Salomon's Mr. Sherman. "Not only did this offering activity soak up all the incremental demand in the REIT market and start stocks going down, it also scared potential additional investors away."

Many investors see a role for REITs in a balanced portfolio, if only as a defensive play. "It's not the most exciting part of our portfolio, but it was never intended to be," says Charles Freeman, lead manager of the Vanguard Windsor Fund. REITs are about 4.3% of his portfolio and his REITs are up 3.5% year to date, not including dividends. Add on a 7% average yield, and that gives Mr. Freeman a 10.5% return so far, and that's "market-like performance.".....

....Now that growth investors have mostly left the sector -- after enjoying total returns of 35% in 1996 and 20% in 1997 -- many believe that the pension funds and value investors are more natural and long-term owners of REIT shares.....

....Jen

-- posted by JenL_3