Real Estate Investment Trusts: What Are They?
If location is the golden rule of real estate, then many who invest in a real estate investment trust (REIT) might at times feel as if they’ve stumbled upon a great deal in the fanciest building in town.
A big acquisition in the commercial real estate market has led observers to speculate that heavy demand will continue for companies whose specialty is investing in real estate.
REITs have shown, at times, returns greater than 25 percent per year in the last several years.
REITs frequently invest in commercial real estate or larger residential projects such as apartments, have dodged the financial wrecking ball that has left cracks in the housing market.
In February, the Blackstone Group, a power hitter in the private equity world, acquired Equity Office Properties in a $23 billion buyout.
The bidding war that erupted over the company, whose properties included certain commercial skyscrapers, spurred talk that other mortgage funds or REITs may be snapped up by private equity companies looking for places to spend their vast quantities of cash.
“More investors seem to find value every fiscal quarter, and 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.
“You’re going to have some investors out there who believe the EOP buyout is not the last and they’re probably willing to stretch their necks out a bit in the current environment because it seems so wide open for M&A activity,” he said.
And even if the gains shown by REITs and the funds that invest in them cool in the coming years (as mortgage loan demand is expected to), which many analysts predict, 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.
The recent volatility in the mortgage market is certainly a factor. While 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 them desirable for investors seeking income from real estate.
“At this point people are investing for appreciation, not income,” Tjornehoj said.
While many REITs focus on commercial properties, some stick to projects in the condo market, while others venture into shopping malls, for example, or apartment complexes, so it’s important for investors 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.
Whether the buyouts will continue is unknown, though some investors will likely be happy with returns from REITs in their portfolio, even if those returns are less than in recent years, when home loan activity soared to new heights.
SOURCE: San Jose Mercury-News