Linneman also sees a slowdown of capital flows into the market. He predicts
that as other sectors of the economy improve, there will be a rotation out of
relatively safe investments—including real estate—into riskier assets. This, he
says, is the “price real estate pays for being connected to broader capital
flows.”
Ultimately, these flows determine investment performance, Lowrey
argues. “If interest rates increase or investor sentiment shifts strongly toward
growth [investments], real estate performance could suffer. However, with the
presidential election looming in the fall, we do not expect interest rates to
rise sharply in 2004.”
REITs
Perhaps the most popular—or at least most publicized—form of
securitized real estate investment is the REIT. REITs own and usually
operate income-producing real estate; some also provide mortgages. They can be
privately held, non-exchange traded or publicly traded. (There are about 180
publicly traded REITs, typically called real estate stocks.)
According to
the National Association of Real Estate Investment Trusts (NAREIT), publicly
traded equity REITs outperformed both the S&P 500 and Nasdaq from 1972 to
2002, and last year, had a compounded annual return of 38.5 percent.
Most
analysts expect REIT returns this year to be substantially lower. “Forecasts are
all over the lot,” says Jay Hyde, NAREIT vice president. “The most optimistic is
15 percent, the most pessimistic is a double-digit decline.”
But all REITS
are not created—or valued—equally. Divided into property types, retail REITs
last year saw average returns of 47 percent, while apartment REITs returned 25
percent. Still, values remain high—some think too high. “Investors moved to
REITs in the last few years for the safety of holding a security backed by hard
assets and an attractive dividend yield,” says Brent Fykes, a financial advisor
at Asset Management Advisors. “We think REITs have become fully valued, and it’s
increasingly difficult to find attractive valuations in the industry.”
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