REITs Hold Their Ground

OK, now real estate fund returns are getting downright ridiculous.

The average real estate investment trust mutual fund is up 5% over the past month and 11% year to date, according to fund tracker Morningstar. And that comes on top of a three-year run when annual gains have averaged a stunning 32%.

To put this extraordinary performance into perspective, small-cap growth is the second-best-returning fund category in Morningstar's year-to-date rankings, and it has gained only 2% in the past month and 8.5% so far in 2006. And forget about the S&P 500 index. Everybody's favorite big-cap benchmark index is up just under 4% since the start of the year.

REITs are often viewed as an investment alternative to bonds because of their healthy dividend yields. But the 10-year Treasury yield, the supposed nemesis of REITs, is up about 30 basis points since 2006 kicked off, suggesting that REIT investors aren't just focused on yields but also are looking at total returns.

For instance, the 10-year is yielding roughly 4.7%, well above the average 12-month yield of 2.72% for Morningstar's real estate category. Dividend yields on individual REITs are typically 100 to 150 basis points above that of the 10-year Treasury, according to Amos Rogers, portfolio manager for the $162 million SSGA Tuckerman Active REIT (SSREX) fund.

"Just when you think yield-based investors would start jumping from REITs to the relative safety of Treasuries, the real story was that they are still piling into real estate funds," says Rogers.

Private Perks

It remains to be seen if the coupon-clipping crowd will stick with their REIT funds after such a pronounced run-up and with safer alternatives growing more attractive. Meanwhile, one set of investors is making their interest in public REITs very well known: private investors.

Fund managers say there is a continuing sense among private-capital players that the public market values public REITs incorrectly. As a result, they are growing more aggressive in their dealmaking.

To view Gregg Greenberg's video take of this article, click here.