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If there is one defining characteristic of the financial markets over the past two decades, it would have to be the ultra-low interest rate environment. For the benchmark U.S.10-year Treasury note, you have to go back to April 1995 to find a time when it consistently paid more than 7%.
This month, the yield on the 10-year dropped below 2% for the first time ever, which delivered both a welcome rise in price for those fortunate enough to own it already as well as an unwelcome dose of frustration for those looking to buy something that offers a reasonable yield.
With ultra-safe assets like Treasury bonds paying next to nothing, stock market volatility nearing historic highs, and gold trading at previously undreamed of prices, there is no obvious choice for investors seeking to put money to work, especially those who want current yield.
One asset class, though, offers a compelling blend of decent current yield and future price appreciation that merits the attention of exasperated, yield-hungry investors: real estate investment trusts (REITs).
To be sure, REITs suffered during the economic downturn of 2008 and 2009 as rents on properties they owned plunged. As a plodding but nevertheless real recovery develops, their fortunes have improved, says S&P Equity Analyst Royal Shepard.
“The gradual economic recovery is helping to stabilize cash flows in most commercial real estate sectors,” he says. “Moreover, a depressed level of commercial-construction activity has constrained new supply while generally serving to increase occupancy levels in existing facilities. We think many REITs, also bolstered by newly raised capital, are taking advantage of the better operating environment.”
There are more than 100 REITs listed on U.S. exchanges, and they own a wide variety of real estate-related assets. In general, there are two types or REITs: those that own actual real estate and those that own mortgages.
As of March, 2010, the largest real estate category owned by REITs was regional shopping malls, which comprised about 14% of REIT assets, according to the industry’s trade group NAREIT. Apartments, health care facilities, and office buildings also each accounted for more than 10% of REIT assets. Mortgage REITs accounted for 8.4% of the total.