Playing the property market
You can invest in real estate without buying another home
The family homestead is often the biggest--and lately the best--investment most people make. But what about stocks that provide exposure to other people's properties, from apartment buildings to office towers to shopping malls and hotels? And for that matter, what about stakes in companies that build, own, or supply the real-estate market?
While the surge in home prices has been well documented, less attention has been paid to the breathtaking run-up in housing and real-estate-related stocks in recent years. Over the past five years, mutual funds that invest in real estate have soared 20 percent a year on average, making them the best-performing U.S. asset class. By comparison, the S&P 500 index has fallen more than 2 percent a year during this stretch and the Nasdaq composite index has lost about 9 percent annually. "I'm inclined to think we're going to see another up year in 2005," says Don Cassidy, senior research analyst at Lipper.
Too hot? To some, this would seem like wishful thinking. After all, history is replete with examples of once hot asset classes that cooled down when Wall Street cast a spotlight on them. Add to this the fact that interest rates are likely to rise in the coming years and real estate is typically hurt in periods of soaring rates. But investors have to keep several things in mind, analysts say. First, long-term interest rates--including mortgage rates--are still near historic lows. And though "a rise in rates would certainly be bad for homebuilders," as it would have a negative impact on financing and demand for new construction, "a rise in rates, if it reflects a strengthening economy, could be good for hotels," says Russell Platt, chief investment officer for Dividend Capital Investments. "Frankly," says Platt, "it would be good for office buildings. And it would be good for retail properties," as more workers and more money mean greater need for office and retail space.
While this may not be an ideal time to step into homebuilder stocks, which rose about 45 percent a year over the past five years, there are still opportunities to be had, analysts say, among retailers that cater to the housing boom, namely Home Depot, the nation's second-largest retailer behind Wal-Mart, and Lowe's, the second-largest home improvement chain behind Home Depot.
This may seem risky, as research shows nearly a third of all money saved through mortgage refinancing is spent on home improvement. If mortgage rates rise and refinancing slows, this could affect these retailers' bottom lines. But analysts note that with the home sale flurry of the past three years, there is enough demand to keep sales of home improvement goods growing for some time. Stephanie Hoff, retail analyst for Edward Jones, believes Home Depot's sales will grow 10 percent over the next several years, while Lowe's could rise by 15 percent a year.
Another winner may be diversified real-estate operating companies, such as Forest City Enterprises. Michael Winer, manager of the Third Avenue Real Estate Value Fund, calls this Cleveland company, which began as a lumber firm but now owns, manages, and develops properties ranging from apartments to office buildings, "one of the biggest blue-chip companies nobody has ever heard of."
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