REIT Run Goes the Distance

REITs are on pace to beat the broader stock market for the seventh year in a row. Many pundits continue to argue that the sector is overvalued and due for a plunge, but shorting REITs solely on valuation has proven to be a fool's game. And those who try to perfectly time buying this sector, thinking it is too expensive, continue to be frustrated.

"Good companies are getting love, and we missed a lot of it," says one value-oriented hedge fund manager, who says he is amazed at how well the sector has done this year. The MSCI U.S. REIT Index is up 24% so far in 2006.

Office REITs continue be the best performers, with SL Green(SLG Quote) up 45% year to date, Boston Properties(BXP Quote) rising 38%, and Equity Office Properties(EOP Quote) and Vornado(VNO Quote) each jumping 32%.

Although gains at that rate will be hard to continue -- and returns likely will drop -- industry watchers note that commercial real estate has undergone a significant repricing in recent years as investors pour money into the market. This wall of money from private equity and pension funds shows no sign of slowing, which in turn will hold up REIT stocks.

Fund Abundance

In recent years, commercial real estate prices have soared as investors chase yield-producing assets. A lot of this has to do with the rapidly aging population in the U.S. and Europe. Pension funds, endowments, foreign investors and wealthy individuals continue to sink money into private equity funds and institutional money managers chasing the "yield plus" returns of real estate.