Market spotlight: Investors pouring money into U.S. REIT funds

May 13, 2008

Despite a sluggish economy, a credit squeeze and slowing fundamentals, investors this year are plowing money into funds that invest in real estate investment trusts, reversing a long trend of outflows.

A total of $1.23 billion flowed into domestic REIT funds in the first three months of the year, according to a recent research note from Keefe, Bruyette & Woods.

The funds include REIT mutual funds, which invest in a diversified portfolio of REIT stocks; exchange-traded funds, or ETFs; and closed-end funds, which raise money once and offer a finite number of shares.

March marked the third straight month of positive inflows into these funds following a 10-month stretch of outflows that ranged between $150 million to $2.8 billion each month.

“Last year, REITs got thrown out with the financials’ bath water,” said Alexander Goldfarb, a REIT analyst at UBS AG.

Outflows from domestic REIT funds started last March and picked up steam in the summer when the credit crisis gripped the markets after an unprecedented number of homeowners defaulted on their mortgages. REIT stock prices got clobbered in 2007, losing 15.69 percent.

But, so far this year, equity REITs are outperforming the broader markets. The equity REIT index has gained 7.13 percent year-to-date, while the Dow Jones industrial average has fallen 3.4 percent and the Standard & Poor’s 500 index has dropped 4.49 percent.

The top equity performers this year are self storage owners U-Store-It Trust and Public Storage, apartment REITs Mid-America Apartment Communities Inc. and Associated Estates Realty Corp. and office owners Liberty Property Trust and Corporate Office Properties Trust.

Investors now are attracted to REITs’ dividend yields of about 5 percent, which are more appealing than yields on Treasuries, said Sheila McGrath, a senior vice president at KBW. Also, investors are realizing that the sector is less risky than other financial stocks because it’s not as highly leveraged, she said.

Goldfarb also added that REITs’ longer-term leases provide a stable cash flow underpinned by hard assets.

“What people are realizing now is those cash flows don’t die overnight the way they do with homebuilders,” Goldfarb said.

The note also showed that inflows outpaced global fund flows in February and March, the first time since January 2007. Through 2007, inflows in global funds helped to keep inflows for all real estate funds in positive territory.

“When U.S. REITs ran up a lot in ‘07, they looked more expensive on a relative basis to other countries,” McGrath said. “But after their slide, across the countries’ property stocks, domestics looked more favorably priced.”


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