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Howard Gold's No-Nonsense Investing
Feb. 25, 2011, 12:00 a.m. EST
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GM grapples with familiar demons
By Howard Gold
NEW YORK (MarketWatch) "” No sector in the U.S. market, not one, has done as well as real-estate investment trusts since the bull market began just about two years ago.
REITs, the publicly traded vehicles that own commercial property and pay out 90% of their income to shareholders, have beaten financials, consumer-discretionary stocks and even gold during the big rally from the market's bottom in March 2009.
A popular exchange-traded fund, the Vanguard REIT Index /quotes/comstock/13*!vnq/quotes/nls/vnq (VNQ 57.29, -0.44, -0.76%) , which tracks the MSCI US REIT Index, tripled from its bear-market low through last Friday's close. That amazing 200.6% move topped gains of SPDR ETFs following the S&P 500 Index's /quotes/comstock/21z!i1:in\x (SPX 1,306, -1.30, -0.10%) financial (up 186.3%), industrial (158.6%) and consumer-discretionary sectors (152.9%).
REITs also set the pace strongly in 2010, with a 28% gain. That trailed only gold and small-cap growth stocks, which have been right in the market's sweet spot. Read Gold's commentary on stellar small-cap growth stocks in MoneyShow.com.
REITs also have had a spectacular long-term performance.
According to San Francisco-based Callan Associates, the FTSE NAREIT All Equity REIT Index gained 10.8% annually over the 10 years ending December 31, 2010. Only gold and emerging-markets stocks did better during that "lost decade" for the S&P 500.
So, can REITs continue their spectacular run? Certainly not at the pace they've set for the last couple of years, but I think they can still do well.
An improving economy, tight supply in commercial real-estate markets and REITs' history of multiyear runs should tilt the scale toward the bulls. But current high valuations for REITs will keep me from buying more until the inevitable pullback occurs.
Spruced-up malls are attracting more shoppers.
Why have REITs done so well? Partly because they did so poorly in the bear market, when the FTSE NAREIT All Equity Index lost 19% in 2007 and another 41% in 2008 "” much worse than the S&P's plunge.
"Real estate is a very capital-intensive business. As a result, REITs were a casualty of the financial meltdown," explained Jim Sullivan, director of REIT research at Green Street Advisors, a Newport Beach, Calif.-based firm specializing in real estate. Since those dark days, though, "capital has become more plentiful and more reasonably priced "” and public owners of commercial real estate have been primary beneficiaries of the recovery."
They've had a huge edge over private owners, who until recently have been frozen out by banks unwilling or unable to lend. "Public REITs have more access to a variety of capital," Sullivan said.
According to Cohen & Steers, a New York-based money management firm focusing on real-estate securities, REITs globally have raised more than $150 billion in total capital since 2008. They've used it to buy depressed property, clean up their balance sheets and do other good things.
Also, the problems plaguing the housing market "” foreclosures, short sales, unemployment "” have been good for REITs that own apartment buildings.
Data from the U.S. Census Bureau show the home-ownership rate dropped to 66.5% in the fourth quarter of 2010, the lowest level since 1998. Meanwhile, the rental-vacancy rate fell to 9.4%, its lowest level since 2003.
High roll-out costs and surging fuel prices spoil a rare profit report.
2:49 p.m. Feb. 24, 2011
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