When Jason Mattox speaks at broker/dealer and investment advisor conferences, he has one message to convey: real estate should be in clients’ portfolios, preferably non-publicly traded REITs. Mattox, executive VP at Behringer Harvard Holdings, a real estate investment company based in Dallas, has been acquiring real estate for investments since graduating from college about 10 years ago.

The need to reallocate investment funds in portfolios after the tech bust has driven pension funds and other institutional investors to acquire more real estate because of its specific benefits, Mattox claims. Mattox recommends REIT investments for 401(k) and other retirement plans because they offer the benefit of diversification, he says. That is, REITs counterbalance the market-sensitive regular diet of stocks and bonds in a typical portfolio. Stocks and bonds are assets that fluctuate more than REITs with equity market and interest rate changes or currency fluctuations.

“Generally speaking, real estate investments–whether traded or not traded–don’t correlate with the markets,” Mattox says. Moreover, REITs are good inflation fighters because the returns grow faster than inflation, REITs also provide a strong income and dividends, and are relatively stable, he maintains. Because they are non-public, Mattox can’t divulge his REITs’ performance “other than to say we have had consistent distributions.”

REIT Returns

According to the REIT Growth and Income Monitor, published by Atlantis Investment Co., Inc.’s research service, Financial REIT yields offer income investors the highest current return, at about 10%. Residential REITs are the sector with the lowest yields, at about 4%, because stock prices for residential REITs have increased more rapidly than dividends, according to the Monitor, which tracks 160 publicly traded REITs with total market cap of $392.9 billion, as of July 2006. The average yield for all REITs as of July 2006 was 5.74%.

REITs are a special investment animal because they are required to pay out 90% of their income in dividends to their stockholders. Part of the dividend may also be classified as a return of capital or as a capital gain, which can enjoy a lower tax rate than ordinary interest and dividend income. REITs themselves usually don’t pay corporate income taxes.

Behringer Harvard generally favors non-publicly traded real estate investments because “they are more like a direct investment in real estate” and “less volatile” than publicly traded real estate, Mattox explains. “Traded REITs may see some adjustment in value if there is a market sneeze.” Or, as the company notes on its Web site: “At times, the stock price of a publicly traded REIT may be more or less than its NAV. As a result, values are subject to large fluctuations and investors experience much uncertainty. Limited partnerships and REITs that are not publicly traded are insulated from general market turbulence.” Mattox notes that he “is hearing from the broker world” this year that investors are putting 5% to 20% of their portfolio in real estate, and some portion of that is in the non-publicly traded funds.

Behringer Harvard is pushing plan participants and sponsors to ask why 401(k) plans exclude real estate–real estate investments are largely non-existent in most of today’s defined contribution plans, the company notes.

One of the funds currently available for investment at Behringer Harvard is its non-traded public Opportunity REIT I, which received a nomination as 2005 REIT of the Year by Real Estate Finance & Investment, a weekly commercial property and capital markets newsletter.

The fund’s board declared an initial distribution at a 2% annualized rate in July. The young REIT, which started in the fourth quarter of 2005, intends to acquire commercial properties that have the potential to provide significant capital appreciation over the fund’s targeted life, which is three to six years from the end of its initial offering period.

REITs have risks inherent in the real estate market–overcapacity, recessions, expenses and poor management, demand and the like. Moreover, the flattening of the residential market and talk of a decline in real estate prices and a bubble bursting is enough to make some investors skittish.

However, Mattox says Behringer Harvard’s real estate group of 31 individuals subscribes to the idea that there is now a return to fundamentals in most of the major real estate markets.

Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at elizabeth.d.festa@comcast.net.