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.