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The last 5 years have been an awesome roller coaster ride skyward for any baby boomer invested in real estate investment trusts, but many are beginning to wonder whether we are approaching the down side of the hill just beyond the crest?

Financial planners say that while that is an important question, there may be other ways to look at the issue.

Total return for the composite REIT index was 30.4% in 2004, according to the National Association of Real Estate Investment Trusts, Washington. That compares with 38.5% in 2003; 5.2% in 2002; 15.5% in 2001; and 25.9% in 2000.

On a 1-year basis, the NAREIT equity REIT index had a 29.9% return compared with an 11.5% return for the S&P 500 index. For a 5-year period, the NAREIT equity REIT index return was 17.4% compared with a negative 2.1% return for the S&P 500. (See chart.)

BB&T Capital Markets is predicting that the Morgan Stanley REIT Index will turn in a total 2005 return of roughly 16.7%, writes Stephanie Krewson, a BB&T equity analyst, in a Dec. 16, 2004, research report. BB&T makes a market, manages and offers investment services for several REITs.

Demographic factors such as the growth in the boomer market and an increase in corporate 401(k) plans participating in REITs, will continue to contribute to the asset categorys growth, Krewson says.

“The REIT market is in the top of the second inning,” Krewson maintains. “There is no sense of where the multiples of REITs should be.” REITs were previously a largely undiscovered small cap sector but now are becoming more a part of mainstream investments, she adds.

By traditional standards, you have to think that there is an overvaluation in the market and that there will be a regression to the mean, says Sal Miceli, a certified financial planner with Miceli Financial Planning, Littleton, Colo.

“I think that REITs are in for a correction. The only problem is that I dont know when,” he adds. It is quite possible that REITs will continue to perform well for the next 2 years, he says. Will there be a correction within the next 10 years? That is also quite possible, he says.

REITs today are akin to the S&P 500 back in 1999, according to Miceli. At that time, there was a “gut feeling” that the S&P 500 was overvalued but also a knowledge that it was going to remain a core part of any portfolio.

“REITS are a strange beast” and there are a number of questions that need to be examined when considering the REIT market, Miceli says. Among the issues he enumerates are where home prices are going and how well business is doing.

So, he continues, what he does for clients is what he would do for any asset class: rebalance to make sure the asset continues to maintain its target percentage of the total portfolio.

Although it can vary according to client, Miceli says, REITs often make up about 8% of a clients portfolio. What is important, he continues, is “to be consistent in what you do.”

Steven Wightman, a certified financial planner with Wightman Financial Network, LLC, in Lexington, Mass., applies 2 philosophies when considering REITs: investing in the class as part of a strategy of diversifying a client across assets and, consequently, spreading those classes of risks; and dollar-cost averaging.

“Real estate has gone up tremendously in value and there have been very few bad years,” he says. It makes sense to buy in over time, he continues.

To achieve this end, Wightman says he uses exchange traded funds that offer low risk and a high return with an expense ratio of 30 basis points.

“We dont have a cookie-cutter portfolio,” Wightman says, and REITs as a percentage of a clients portfolio depend on that clients situation. For example, he says that if a client owns a home and a couple of apartment houses, then REITs might not be an appropriate investment.

But, if it is appropriate, then REITs offer other advantages, he says. For example, they are like stocks in that they are not taxed until they are sold, he says, and like stocks, they can be transferred to a child.

And, according to Wightman, although like any investment class, there might be a downward rotation in the class, “interest rates are going up gingerly and modestly. The Fed has been sensitive on the throttle.”

But he also notes the importance of diversification, particularly if you are going to need the money in a year or two. So, if you are going to need money for retirement, this has to be a factor that you keep in mind, Wightman says.

Richard Crouse, a certified financial planner and president of GVC Financial Inc., Altamonte Springs, Fla., also stresses the importance of diversification.

His guideline is that no more than 20% of an investment portfolio should be in real estate including REITs, he says. That 20% would not include a clients home, he continues. He notes that 20% would be on the high end of the spectrum.

He also believes in diversifying the portfolio as well as the type of REIT within the portfolio, particularly if there is a fairly low leverage, for example, 30%. In such cases, it is important to make sure there is sector or geographical diversification because you have more equity in those programs, according to Crouse. He says it can be beneficial to be in 2 or 3 REIT sectors. “Diversification brings flexibility and I like flexibility. Im old school,” says Crouse.

Crouse also says he uses unlisted REITs, or REITs that are not registered by trade daily, because there is less volatility than with publicly traded REITs. With publicly traded REITs, he says, investors often buy for yield and when interest rates rise, they sell them. “For a long-term buy and hold person, an unlisted REIT can be a good investment,” he adds. “It offers a more stable NAV [net asset value] stream,” he says.


Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.