Real Estate Funds Rally 33% in Three Months

NEW YORK (TheStreet) -- Real estate mutual funds, ground zero for the financial meltdown and housing bust, returned 33% in the past three months, ranking as the top-performing category, according to Morningstar.

As a result, real estate stocks no longer sell at hefty discounts. Still, property funds show an attractive balance between risk and return for investors who want to get back into real estate. The industry has bottomed, or at least isn't declining at the same pace as the past 18 months, reports have suggested. Some of the best bets may be AIM Real Estate(IARAX Quote), Neuberger Berman Real Estate(NRO Quote) and Alpine Realty Income & Growth(AIGYX Quote).

Investors ought to view real estate funds as long-term investments, not as vehicles to make a quick buck during boom times. The funds currently yield 3.6%, compared with 2.1% for the S&P 500 Index. During the past decade, real estate funds have returned 7.8%, while the S&P 500 has lost value.

The value of real estate as a tool for diversification was highlighted when Internet highfliers crashed in 2000. While the S&P 500 dropped 9% that year, real estate funds gained 27%. Having been burned by stocks with sketchy earnings, investors raced to buy real estate, which appeared to be a solid asset that always retained some value.

Seeing how real estate performed during the tech downturn, investors from around the world began snapping up commercial real estate and real estate investment trusts, or REITs, which hold portfolios of offices, apartments or other properties. Aggressive private investors borrowed heavily and bid up prices to record levels.