REITs - what and why

REITS are technically investment trusts that works like closed-ended funds holding real estate instead of stocks or bonds.

REITS pool investor money to allow average individual investors to invest in a portfolio of

• commercial,
• residential, or
• specialized real estate properties.

By buying shares in a REIT, you take proportional ownership in the real estate ventures that the trust owns. And these ventures range beyond traditional properties to health care and retirement facilities; ports and warehouses; even car dealerships, penitentiaries, and high-end hotels.

Certain REIT characteristics make them attractive to the value investor.

• Like closed-ended funds, REITS trade on the exchanges, often at a discount to NAV.
• It is possible to focus on certain types of real estate or certain regions of the country.
• And, typically, they pay healthy yields, often in excess of 5%, while providing some downside protection.

In the US, there are about 190 publicly traded REITs with some $400 billion of assets.

• REITs performed very well during the 2000-2002 market correction, and continued to perform well as real estate prices boomed in the middle of the decade, with a gain of 35% as a group in 2006.
• But as the real estate market soured in 2007, REITs and particularly those in the mortgage business or with highly leveraged portfolios, tended to suffer.

Investors like REITs for:

• their yield,
• their ownership with hard physical assets,
• their stability, and
• for their long-term performance, estimated at over 13% annually during 1975-2005, which is better than most stock investments.

Many investors pick REITs for their negative correlation with stocks - when stocks are doing poorly, REITs are doing well or are holding their own.