Investors yank cash from REITs

Due to negative returns, investors are pulling money out of mutual funds that invest in real estate investment trusts, but financial advisers believe that now is not the time to trim holdings.

If anything, the current market represents a buying opportunity, they said.

“It’s like Christmas,” said William Howell, president of Howell Financial Advisors Inc. of Noblesville, Ind.

For new buyers, there are bargains to be found, and for REIT owners, dividends can be reinvested at a discount, he said.

Many investors, however, and some advisers, aren’t buying it.

Year-to-date through October, the latest data available, specialty-real-estate mutual funds — a category created by Morningstar Inc. of Chicago, made up mostly of funds that invest in REITs — had seen net inflows totaling $3.83 billion, according to Financial Research Corp. of Boston.

During the comparable period last year, the category netted $9.88 billion, according to FRC.

Monthly outflows, it seems, are starting to take their toll.

Investors pulled $431 million more out of the category in October than they put in.

That followed outflows of $1.48 billion in August, $2.35 billion in July and $1.92 billion in May.

PLAGUING THE INDUSTRY

It’s a trend that, because of the penchant for investors to chase returns, is expected to plague the category in 2008.

Year-to-date through Dec. 12, the specialty real estate fund category was down 10.77%, making it the worst-performing domestic stock fund category, according to Morningstar.

Such poor performance is understandable. The FTSE NAREIT All REITs Index had dropped 14.71% year-to-date as of last Tuesday, according to the National Association of Real Estate Investment Trusts Inc. in Washington.

By comparison, the Standard & Poor’s 500 stock index was up 6.06%, the Dow Jones Industrial Average was up 7.78%, and the Nasdaq Composite Index was up 9.81%.

Some advisers, however, said they aren’t willing to give up on REITs, which until this year had outperformed the broad market for seven years.

“We believe various sectors of the real estate marketplace will be attractive going forward, including shopping centers and apartments, especially in growth areas, as newcomers are unable to buy new homes due to a credit squeeze, and commercial space, as business continues to expand,” said Terry J. Siman, president of Vantage Point Advisors Inc. of Blue Bell, Pa.

International REITs are also poised for growth, he said.

“We’re bullish on REITs,” Mr. Siman said.

“Bullish” may be too strong a word to describe how Raymond Nasser feels about REITs, but the registered financial adviser in Midlothian, Va., said: “The time to cut back on exposure has come and gone, and today, one should be considering putting more [money] in the asset class.”

Other advisers, however, aren’t so sure.

This year, when Sam Zell sold Equity Office Properties Trust of Chicago — the largest office REIT in the United States — to The Blackstone Group, a private-equity firm in New York, that was a good signal to leave the REIT market, said Greg Zandlo, president of North East Asset Management Group Inc. in Coon Rapids, Minn.

The billionaire investor has an “uncanny” ability to sell near market tops, he said.

“I have not re-entered REITs since, and look for tough times into 2008,” Mr. Zandlo said. “I believe the U.S. will export a global slowdown, and the real estate market … will be flat at best.”

REITs are still just a little too risky a bet, agrees Andy Berg, a principal with Homrich & Berg Inc. in Atlanta.

“We went from a 10% allocation to REITs in 2000 to zero at the beginning of 2007,” he said. “We remain at zero and expect to remain there in 2008, unless valuations become materially more attractive.” 

The Equity Office deal was a turning point for the REIT market, said Samuel A. Lieber, chief executive of Alpine Woods Capital Investors LLC of Purchase, N.Y.

Some people believed that it signaled that more deals would come, but they were overly optimistic, he said.

“Clearly, the economy was worse than people thought,” said Mr. Lieber, manager of the $127 million Alpine U.S. Real Estate Equity Fund and the $2.35 billion Alpine International Real Estate Fund.

As a result, REITs have suffered, he said.

Matters, however, are improving, Mr. Lieber said.

‘MORE INTERESTING’

“REITs are a lot more interesting today then they were six months ago,” he said.

J. Michael Martin, president at Financial Advantage Inc. in Columbia, Md., agrees.

One REIT position to which he’s added in recent weeks is CapLease Inc. (LSE) of New York.

What makes it unique is that its assets are commercial buildings occupied under long-term leases by investment-grade tenants, Mr. Martin said.

“Our assessment is that the stock got cheaper in sympathy with the mortgage industry problems, but its business risks are quite different,” he said. “We own it in our income-producing category.”

Given the current investment climate, however, Mr. Martin said it’s the only REIT on which he’s willing to take a risk at this moment.

David Hoffman can be reached at [email protected].