Funds Invested In CRE :The 2011 Results Are In

In an otherwise awful year, real estate funds gained an average 7.6%, vs. a 2.9% loss for the average stock mutual fund, according to Lipper.

This may seem puzzling to homeowners: The Federal Reserve estimates that homeowners have watched $7 trillion evaporate since the housing bubble burst in 2006.

Real estate funds invest in commercial real estate and generally don’t invest in physical property. They buy and sell shares of real estate investment trusts (REITs), which invest in malls, apartments, office buildings and hotels.

By law, a REIT has to pass virtually all its earnings to shareholders in the form of dividends, one reason REITs did all right last year: The average REIT had a dividend yield of 4.83% in December, says the National Association of Real Estate Investment Trusts.

“Dividend yields had a big appeal in a low interest-rate environment, with 10-year Treasury yields at less than 2%,” says Jeffrey Kolitch, portfolio manager of Baron Real Estate fund.

Real estate aficionados like to say real estate has to go up because they’re not making any more. In today’s environment for commercial real estate, that’s fairly true. Since there’s so much supply, and lenders aren’t in a lending mood, relatively few new buildings are going up. That’s good for investors, Kolitch says, particularly those who invest in apartment buildings.

Even though house prices have fallen dramatically from their 2006 highs, and mortgage rates are low, many people are still renting — so much so that apartment owners have been able to raise rents. “People are concerned about their jobs, and don’t feel confident buying a new home,” says Steve Brown, senior portfolio manager at American Century.

Another type of REIT that’s benefiting from hard times: storage units. “REIT storage companies are benefiting as activity has picked up from foreclosures,” Baron’s Kolitch says. The storage-unit industry is changing, Kolitch says. Big companies such as Public Storage are edging out smaller mom-and-pop storage companies.

Office space REITs are still somewhat problematic, given the current high unemployment rate. Still, some REITs in areas where it’s tough to put up new buildings (New York, Boston) could fare well this year, Kolitch says. In the middle of the country (Cleveland, Chicago) job creation is modest, and there’s not much office space demand, Brown says. Nevertheless, given low interest rates and an improving economy, real estate funds may continue to give concrete returns. (credit, j, waggoner, usa today)

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