Playing the property market
You can invest in real estate without buying another home
Forest City's strength lies in its diversity. A significant rise in rates could hurt housing starts, which in turn could affect Forest City's lumber operations. But at the same time, rising rates may lead to a jump in rentals, which could boost its apartment properties.
A simple way to find real-estate opportunities is to look for healthy pockets in the economy. The recent uptick in business travel is focusing attention on hotel companies like Hilton Hotels. "When you look at hotel companies since 9/11, many have done a great job in increasing occupancy, but they've achieved that with lower-paying group business," says Joseph Betlej, manager of the Ivy Real Estate Securities Fund. "Now that the economy is improving, they're replacing that with higher-paying business travelers."
Perhaps the most popular real-estate plays are real-estate investment trusts, or REIT s, which own and manage properties ranging from apartments to offices to industrial facilities. By law, REIT s must pass along to their shareholders 90 percent of their taxable income, which they generate from rental payments and asset sales. Jim Trowbridge, a portfolio manager for the AIM Real Estate fund, says regional mall-oriented REIT s look particularly attractive. Despite soft patches in the economy, "retail spending has really held up, and an improvement in the job picture should give consumers more confidence," he says.
One of Trowbridge's top holdings is Simon Property Group, which owns about a third of leading U.S. malls. Simon is extremely diversified, as no single retail tenant makes up more than 5 percent of the firm's rental base. Moreover, rents on newer leases are 20 percent higher than on expiring ones, according to Morningstar.
So far this year, around $6 billion of new money has gone into REIT mutual funds, which invest in REIT s of all types. Among the most consistent players over the past one, three, and five years have been AIM Real Estate, Cohen & Steers Realty Shares, and T. Rowe Price Real Estate. Some more-eclectic options are Security Capital U.S. Real Estate and Third Avenue Real Estate Value.
There is another reason why stock market investors may want to consider having a long-term position in real estate. Studies have shown that holding a small portion of your portfolio in REIT s helps reduce risk. For example, a portfolio of 50 percent stocks, 40 percent bonds, and 10 percent cash returned 10.9 percent a year on average between 1972 and 2003, according to an analysis by Ibbotson Associates. But had you shaved some of your stock and bond holdings and put the money into REIT s, you'd have done better. A 40 percent stock, 30 percent bond, 20 percent REIT, and 10 percent cash portfolio returned 11.5 percent a year during this stretch--and with lower volatility.
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