11/18/2013 7:45 PM ET|
This sector is ready for an explosive rebound
Largely left out of the 2013 rally, real estate investment trusts offer better yields than most income alternatives. And with demand building, investors will reap big rewards if the economy roars back to life.
When I look for stocks to buy, I try to avoid industries that everyone else loves. Rather, I like to look at the sectors that have lagged the most.
Here's an example: At the end of September, the average large-company stock fund had returned 20 percent for the year. Of the 14 mutual fund sectors Morningstar surveyed, all but one had shown a positive return. The exception was precious metals funds, down a whopping 41 percent. But because I have a lifetime aversion to owning anything connected to gold, I looked at the next-worst performer; it was up a measly 2 percent.
That sector was real estate. Most real estate stocks these days come packaged as real estate investment trusts, or REITs. A REIT is a company that owns a portfolio of properties that generate income from rentals plus capital gains when they are sold. A REIT must pass on at least 90 percent of its profits to investors in the form of dividends. A total of 171 property-owning REITs trade on the New York Stock Exchange, with a total market value (shares times price) of $657 billion.
Most REITs specialize in a particular kind of property: Office buildings, apartments, hotels, shopping centers, industrial buildings, medical facilities and self-storage units are the major categories. (Other REITs invest in mortgages, but my focus is on property-owning REITs.)
A big appeal of REITs these days is their dividend yields -- on average, 4.1 percent at a time when a ten-year Treasury note yields 2.7 percent. Of course, because REITs depend on their own earnings to fund payouts to investors, those dividends aren't guaranteed. In 2009, for instance, one of the largest REITs, Vornado Realty Trust (VNO), which owns offices and retail space, cut its annual dividend rate from $3.52 per share to $1.52. Since then, the payout rate has inched back up to $2.92. Vornado's stock, which I like, peaked at $137 in February 2007 and plunged to $27 by March 2009, before recovering to its current price of about $90. (All prices, yields and returns are as of Nov. 15.)
It's no secret why Vornado's price fell. Real estate values soared in the early and mid-2000s, then collapsed starting in 2007, triggering a sharp recession. The S&P Case-Shiller index of home prices rose moderately from 70 in 1988 to 100 in 1999, then rocketed to nearly 200 in 2007 before dropping to about 125.
The values of homes and other kinds of real estate aren't always linked, but the collapse of residential prices affected commercial property values, too. For instance, shares of the average REIT that owns retail space fell 45 percent in 2008, compared with a 37 percent plunge for the Standard & Poor's 500 Index ($INX).
Residential housing prices have been climbing back over the past two years. They are up 12.4 percent in the past year alone, and other real estate sectors are up, too. The CoStar General Commercial index, for instance, shows that prices of office buildings sold in the past year have risen by 8.7 percent.
Investors have anticipated the rebound. Shares of Equity Residential (EQR), a giant apartment-building REIT, rose 58.1 percent in 2010 and 12.8 percent in 2011. But as investors looked forward, their enthusiasm waned. Equity Residential rose a mere 2.5 percent in 2012 and has fallen 9 percent so far in 2013, trailing the S&P by a mile.
Vacancy rates for apartments nationwide are now a low 4.3 percent, and average rents have been rising steadily. But it's the future that counts, and real estate experts worry that the market is softening.
Why? Three reasons. First and foremost is the economy, which is still running a low-grade fever. It just can't seem to regain robust health, and spending and household formations are suffering.
Second, low interest rates in recent years and the lack of new construction have inspired developers to build more. In the apartment sector, for example, a lot of units will be coming online in 2014 and 2015 (though still at only about half the rate of 2000-2007). If the economy comes back, things will be fine; there will be plenty of renters to occupy those units. Otherwise, it may be hard to raise rents and fill properties.
Third, although interest rates are still low (inspiring developers to build now), they are rising -- making mortgages more expensive and discouraging consumers.
So where do we go from here? I am optimistic enough to be willing to buy, though I'd feel more comfortable if REITs fell another 10 or 20 percent.
Here is the case: Demand is building up in the economy, and when it is released, it will explode -- maybe even as much as it did right after World War II.
Young Americans want to move away from their parents, businesses want to expand and retailers want to open new shops. But the economy has them scared. If the U.S. continues to grow at just 2 percent a year, then interest rates won't rise much, and REIT yields in the 3 to 4 percent range will continue to look attractive compared with other income alternatives. Meanwhile, if the economy comes roaring back, REITs will be huge beneficiaries.
What to buy
Vanguard REIT Index (VGSIX), a mutual fund that tracks the MSCI REIT index, is a solid choice. It charges just 0.24 percent per year and has returned 9.2 percent annualized over the past ten years with a portfolio that includes the works: apartment, office, retail and specialty REITs. Its biggest holding is the largest REIT, Simon Property Group (SPG), which owns about 325 shopping malls.
For an actively managed fund, the best is Cohen & Steers Realty (CSRSX), run by a firm that specializes in real estate stocks. Its annual expense ratio is higher, at 0.98 percent, but its record over the past ten years is a bit better: an annualized return of 10.2 percent. Simon Property is also this fund's top holding, but the rest of the portfolio looks very different from the index. One drawback is its $10,000 minimum investment.
As for individual REITs, look for those with yields that are above the industry average. Washington REIT (WRE), with a 4.9 percent dividend, is a well-run company with a mix of office buildings, shopping centers and apartments in and around the nation's capital. (I recommended the stock in a February article on ways to get annual income of 4% or more.) Glimcher Realty Trust (GRT) offers a 4 percent yield and owns regional malls, such as Colonial Park in Harrisburg, Pa., while Healthcare Trust of America (HTA) pays a 5.4 percent dividend and owns medical office buildings.
Over the past ten years, the REIT subsector with the best record is self-storage, with annualized returns of 18.4 percent. Rather than buying a bigger house, some people rent a storage unit for their stuff. I am a big fan of Public Storage (PSA), the largest REIT in the category, with a market value of $28 billion, and its 3.4 percent yield. Public Storage shares got clobbered in 2007, but they have risen in each of the past six years, including 2008 (a rare stock that climbed during that calamitous year) and 12 percent so far in 2013.
Uh-oh. Should a contrarian be wary of a stock Mr. Market likes so much? Well, yes, but I am willing to make a few exceptions for great companies.
More from Kiplinger's:
VIDEO ON MSN MONEY
Well, Well , Well if it's not JK (36,000 DOW) Glassman ! So now you are back peddling REITS !
No thanks ! Your record is not very good at all ! Maybe you should look for a job elsewhere because we all know you are not qualified to give financial advice !
For those of you that are not familiar please google : Glassman - DOW 36,000 ! It will give you a good laugh !
I too suspect you of personal involvement in the stocks you try to promote at the expense of investors. Pump and dump is the least of the schemes you seem to be promoting for your own gain.
Dear Mr. President Barack H Obama:
The debt ceiling has been paid for in many ways. The foremost way was the "The Stealth Navy Boat" sold to our NATO allies at $1 Trillion dollars USD a piece or 17 Navy Vessels. I understand you may not want to divulge "top secret" munitions to even our allies. So we have alternatives to wipe-out the debt. Such as reinstituting the tradition of "fish on Friday" within these United States of America. It will create Billions of dollars in the US fishing industry and millions of jobs, adding to health or brain food protein and altering sobriety levels in the working class, giving way to less intoxication or "alcoholism" and domestic disputes and destruction of personal property, alleviating replacement costs and lowering auto insurance, home insurance, and health insurance... most importantly: broken homes = dysfunctional families. Let's us now seek out more incurred debt? "Every time an American buys a foreign car, a person loses a job in the USA." So we should support the Union label. Again adding tax dollars to the US Treasury. The idea of "moonshine" running transportation, is foolish and more expensive to the land of plenty. We can create in diplomacy a greater allied force, by being the "bread basket" to them and earn, not just income in foreign trade, but make friends from unstable Nations with "bread and wine." Now we're becoming the "melting pot" once again, where God calls a people His people, that were not my people, including Indians. "When they cry peace, peace, peace, then will the war (or contest) begin." When all Nations will have a chance to be called His people (contest means competition or war). Jesus didn't define war, but revealed it to me a few days ago. As another venue to the debt is have those Farmers continue to grow grass, for cattle manure, pig dung, and chicken droppings, that even when mixed with sewerage, the grasses added become methane for individual methane converters, for both home and auto. Now there is the mysterious ability of magnetism or lodestone, as found in "Ripley's Believe it or Not" and lodestone hill. That leaves a non-vapor charge to pull the iron horse from highway to byway. Simple polarity in physical mechanics, the wave of the future. Even for homes as found in the circulator, for both heat and electricity, near perpetual motion. Now is the debt ceiling paid? I would think so.
Karen Elizabeth Dudley, the two will become one flesh. Thank you!
REITs may not be up this year, but that's because they had previously run up and are still overpriced right now--even after being clobbered by the "taper talk". And since tapering hasn't even started yet, I wouldn't bet that REITS won't be really clobbered when it does start.
Mr. Glassman is the author of "Safety Net: The Strategy for De- Risking Your Investments in a Time of Turbulence," just out from Crown Business. He is executive director of the George W. Bush Institute.
It says it all as he is a GOP shill who is only interested in lining the pockets of himself ad the already rich!
Stuff it stuff all your cash somewhere that not one greedy person can find it tell everyone your broke from the last 100 chances you took. stay ahead of them all cash is king. look what they did with gold all the commercials about buy gold now its a joke who can afford it but the upper 1%. it has been padded to rip off good hard working people. good luck. don't listen to me listen to your heart do you feel safe investing now. how much more can we take from the almighty greedy. Coravette
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The major averages punctuated a solid week with a subdued Friday session. The S&P 500 shed 0.2% to narrow its weekly gain to 1.7%, while the Nasdaq Composite (+0.1%) displayed relative strength. The tech-heavy index finished the week in line with the benchmark average.
Market participants went into today's session expecting to hear some new insight from Fed Chair Janet Yellen, who delivered the keynote address at this year's Jackson Hole Symposium. Unfortunately, the ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'