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The Week's Best and Worst Real Estate Funds

Don't let this week's huge move in real estate stocks fool you into believing the real-estate recession is over. The professional bargain hunters are out in force, buying out companies on the way down before other private-equity firms snatch up the deals.

Tishman Speyer Properties LP and Lehman Brothers Holdings (LEH) sparked a rally in real estate investment trusts with a $13.5 billion agreement to buy Archstone-Smith Trust (ASN). With the prospect of apartment rents rising 6% or more in 2007, the ability to acquire a block of 86,000 in one purchase was too good to pass up.

Also on the takeover list is Pennsylvania Real Estate Investment Trust (PEI). A minor shareholder, London-based LaSalle Investment Management, reportedly offered $55 a share for the company.

Excluding two funds that short the sector, the potential for REITs to be bought out by private-equity firms sent the average real estate fund we track up 5.57% for the week ended Thursday, May 31.

The two funds leveraged to the Dow Jones U.S. Real Estate Index, Ultra Real Estate ProShares (URE) and (REPSX)ProFunds Real Estate UltraSector ProFund (REPSX) jumped an earth-shattering 13.31% and 9.90%, respectively.

The ProFunds Real Estate UltraSector ProFund is allocated to 90.3% REITs, 5.6% real estate, 3.6% forest and paper products and 0.5% diversified financial services. It has large holdings of Simon Property Group (SPG), Equity Residential (EQR) and Prologis (PLD).

The biggest moves over the four trading days were Archstone-Smith Trust, up 20.67%, Highwoods Properties (HIW) up 13.05%, AvalonBay Communities (AVB) up 12.66% and Pennsylvania Real Estate Investment Trust (PEI) up 11.62%.

Top-Performing Real Estate Funds
Fund Ticker Rating Fund Type 1 Week Total Return
Ultra Real Estate ProShares URE U ETF 13.31%
ProFunds Real Estate UltraSector ProFund REPSX C+ Open-End 9.90%
John Hancock Funds II - Real Estate Sec Fund JIREX U Open-End 8.03%
DWS RREEF Real Estate Securities Fund RRRAX B+ Open-End 8.01%
SSgA Tuckerman Active REIT Fund SSREX A Open-End 7.87%
Old Mutual Heitman REIT Fund OBRAX B+ Open-End 7.80%
iShares FTSE NAREIT Residential Index Fund REZ U ETF 7.74%
ING Real Estate Fund CRARX C+ Open-End 7.67%
iShares Cohen & Steers Realty Majors Index Fund ICF C+ ETF 7.66%
Morgan Stanley Real Estate Fund REFBX C- Open-End 7.51%
Source: Bloomberg

Investors who followed the private-equity smart money sent the REITs soaring and crushed the two funds negatively leveraged to these stocks. UltraShort Real Estate ProShares (SRS) dove 11.65%, while (SRPIX)ProFunds Short Real Estate ProFund (SRPIX) felt the pain of a 6.26% slide.

Not participating in this week's rally are the homebuilders. Backtracking a little, the iShares Dow Jones US Home Construction Index Fund (ITB) slipped 0.80%. Its largest holdings include Lennar Corp. (LEN), NVR Inc. (NVR) and KB Home (KBH) with the largest declines going to M/I Homes' (MHO) 4.16% drop, a 2.86% decline in NVR and a 2.67% loss in Skyline Corp. (SKY).

This week, NVR experienced selling from three insiders. Also, Pulte Homes (PHM) trimmed 0.98% from its stock and 16% from its employee base in an announcement of another 1,800 layoffs.

U.S. Treasury Secretary Henry Paulson may have declared the demand slump in housing to be over, but whether he's right remains to be seen. Bank lending standards are still restrictive and as many as 50 subprime lenders are out of business. This accounts for the sub-par performance of the (FSVLX)Fidelity Select Home Finance Portfolio (FSVLX).

The fund is 31.5% invested in diversified financial services, 27.6% in savings and loans, 16.5% in banks, 16.1% in insurance, 2.6% in REITs and 1.6% in software. Countrywide Financial (CFC), which represents 11.5% of the fund, fell 2.65% for the period. The biggest fall was the 9.94% drubbing of Clayton Holdings (clay) -- a result of a negative outlook for its mortgage securitization surveillance service.

Worst-Performing Real Estate Funds
Fund Ticker Rating Fund Type 1 Week Total Return
UltraShort Real Estate ProShares SRS U ETF -11.65%
ProFunds Short Real Estate ProFund SRPIX U Open-End -6.26%
iShares DJ US Home Const. Index Fund ITB U ETF -0.80%
SPDR S&P Homebuilders ETF XHB E- ETF -0.25%
Alpine Global Premier Properties Fund AWP U Closed-End 0.05%
Fidelity Select Home Finance Portfolio FSVLX E- Open-End 0.20%
RMR Asia Pacific Real Estate Fund RAP U Closed-End 0.51%
EII International Property Fund EIIPX U Open-End 0.78%
Dividend Capital Realty Inc Alloc. Fund DCA C+ Closed-End 0.94%
Fidelity Real Estate Income Fund FRIFX C Open-End 1.00%
Source: Bloomberg

Buyers still believe that if they wait a little longer, prices may come down further. Until this mind-set changes, the real-estate recession will continue. So, selling individual homes one at a time is still tough. But, if you have a company that owns several thousand homes filled with renters, your chances of making a bulk sale have improved.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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