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Real Estate Revival Seen by Fund Managers

Stocks in this article: HST HOT EQR

Smith likes Host Hotels & Resorts (HST), which owns upscale properties that operate under such brands as Ritz-Carlton and Four Seasons. He says the stock sells at a discount to the value of the assets. The company should report growing earnings as business travel increases in coming years.

Smith also owns Starwood Hotels & Resorts (HOT), which operates properties under such brands as Sheraton and Westin. Besides showing gains in the U.S., the company is expanding into the fast-growing markets of Asia.

Investors should also consider apartments, says Paul Curbo, manager of Invesco Real Estate Fund (IARAX), which has returned 11% annually during the past 10 years, outperforming 95% of competitors. Demand for apartments is growing as owners leave single-family homes to become renters. With bankruptcies and unemployment increasing in the last several years, 3.5 million households have moved from single-family homes to apartments, according to CoStar Group, a real estate tracker. "We are in the midst of a long-term decline in home ownership," says Curbo.

Curbo owns Equity Residential (EQR), which owns 152,000 apartments in 24 states. He also holds Essex Property Trust (ESS), which owns units in San Francisco and other markets where demand for apartments is strong.

Another reviving area is the industrial sector, which includes warehouses that are used by retailers and other companies that need to store inventory. Warehouses have been benefitting from the continuing increase in global trade, says Brian Jones, manager of Neuberger Berman Real Estate (NREAX), which returned 5.3% annually during the past five years, beating 99% of competitors. Jones says the volume of trade moving in and out of U.S. ports has been increasing at a double-digit rate this year, an indicator that warehouses will enjoy rising demand.

A favorite holding is AMB Property (AMB), which owns warehouses near busy airports and sea ports in cities such as Miami and Seattle. The stock pays a dividend yield of 4.3%. Another holding is ProLogis, a global warehouse operator that yields 5.3%.

Not all real estate companies suffered equally during the downturn. Among the most resilient were operators of self-storage units, says Kelly Rush, manager of Principal Real Estate Securities (PRRAX), which returned 3.1% annually during the past five years, surpassing 87% of competitors. During boom times, demand for self-storage facilities increases as home owners have more stuff to keep. In recessions, demand remains healthy as people who lose their homes must find a place to temporarily store possessions.

Rush holds Public Storage (PSA), which owns 2,100 self-storage facilities. "It is an efficient operator that is very savvy about developing new properties," Rush says.

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Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.
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