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Building a case for real-estate funds.
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Author: Kaye, Steven D.
Section: News you can use
Investing
| BUILDING A CASE FOR REAL-ESTATE FUNDS |
High yield and a healthy market are draws
Real estate just gets
no respect. Most of the 15 or so mutual funds that specialize in
commercial properties have sputtered this year. Meanwhile, stock funds
are up 15 percent, technology funds 22 percent, utility funds 10
percent -- even bond funds, for Pete's sake, are up 9 percent. The
average real-estate fund has eked out a 3.6 percent gain, and the two
biggest, Fidelity Real Estate and Cohen & Steers Realty, have
gained even less (table, below).
Yet the real-estate
market is humming. Office vacancy rates have dropped, and rents have
climbed over the past few years, says Joe Harvey, an analyst at Cohen
& Steers. In Boston, for example, vacancies have fallen by a third,
to 10 percent, since 1993. And with little new construction underway,
says Fidelity fund manager Barry Greenfield, vacancy rates should fall,
supporting higher rents. "Most real-estate fund managers don't know why
share prices haven't gone up," he says.
Shareholders can't be
blamed for wanting to dump the funds. But selling now -- or ignoring
real-estate funds if you are not a current shareholder -- may be
shortsighted.
The REIT stuff.
Real-estate funds don't actually buy real estate. They buy shares of
real-estate investment trusts, or REITs -- companies that own office
buildings, warehouses, shopping centers and apartment complexes.
Fidelity Real Estate, for example, owns $26 million worth of Long
Island-based Kimco Realty, which buys and refurbishes ailing strip
malls. Cohen & Steers's portfolio includes Post Properties, which
builds upscale apartments in the Southeast.
REITs have special
appeal to investors because they pass through at least 95 percent of
income as dividends. That makes REIT stocks a relatively high-yielding
investment that tends to do well when the bond market does well. REIT
stocks now yield 7 to 8 percent on average, exceeding 10-year Treasury
bonds' 6.2 percent yield.
Until recently, REIT
stocks also thrived, and then some, along with the stock market. Their
total return -- price appreciation plus dividend income -- had beat
that of the Standard & Poor's 500-stock index every year for four
years running. But this year, through May, REITs have returned only 4
percent, compared with the S&P's stunning 17 percent.
Oversupply has been
one problem. Wall Street cranked out so many new REIT offerings in 1993
and 1994 -- $16 billion worth, jacking up the total market by 50
percent -- that by the middle of last year, "buyers were up to their
gillsin REIT shares," says Cohen & Steers co-manager Bob Steers.
Wall Street got the message and has offered only one REIT this year,
worth about $150 million.
Investor naivete also
hurt, says Dean Sotter, who manages REIT accounts at Heitman Financial
in Chicago and co-manages the Heitman Real Estate Fund. After REIT
funds gained 15 percent in early 1993, first-timers piledin, doubling
industrywide assets. When REITs slumped last year --along with most
investments -- those greenhorns weren't about to buy more, even at
lower prices.
Professionals,
however, are more likely to know a buying opportunity when they see
one. Sotter's institutional clients, for example, have upped their REIT
stakes by 20 percent this year, mostly since the end of the first
quarter. Most of 1995's scant gains came in the past six weeks. Ken
Gregory, a San Francisco money manager and editor of the No-Load Fund
Analyst newsletter, expects very strong institutional interest in REITs
in the next few years as more money managers come to appreciate their
high liquidity compared with direct property ownership.
That's a message for
individuals, too, he says. Last month, Gregory switched a portion of
his clients' bond-fund assets into Cohen & Steers Realty, ramping
up from a 10 percent average allocation to about 13 percent. With a
healthy real-estate market, Gregory says, REIT stocks' total return
should reach 12 percent or so for the next few years, and their high
yields offer some protection from broad market declines. That doesn't
sound exciting after this year's stock-and-bond fest -- but buying low,
remember, is the first half of the famous formula.
Bargain properties?
Most real-estate funds have lagged this year's soaring
stock and bond markets and may be good buys now.
12-MONTH 3-YEAR 1995
YIELD RETURN RETURN
FUND (PERCENT) (PERCENT) (PERCENT) PHONE
CGM Realty 4.7 NA 6.1 800-345-4048
Cohen & Steers Realty 5.1 52.0 2.4 800-437-9912
Evergreen U.S. R.E. 2.0 NA 12.7 800-235-0064
Fidelity Real Estate 5.2 36.0 2.3 800-544-8888
Heitman Real Estate* 6.3 39.3 0.0 800-888-7348
Retirement Planning R.E. 4.2 NA 2.7 800-279-0279
*Formerly called PRA Real Estate
Note: Returns are as of June 15. NA: Not applicable.
USN&WR -- Basic data: Lipper Analytical Services
ILLUSTRATION
~~~~~~~~ By Steven D. Kaye
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