New York -- If you're looking for more growth and income from your investments, you might be considering real estate stocks. Real estate-oriented mutual funds have been flying high -- up nearly 28 percent in the year ending March 31, according to Lipper Analytical Services, with dividends mostly in the 2.5 percent to 5 percent range.
Real estate investment trusts (REITs) have done even better. The 149 "equity" REITs followed by the National Association of REITs rose more than 32 percent.
Equity REITs own properties and distribute at least 95 percent of their income to investors. Most of such trusts specialize in certain parts of the country and certain kinds of real estate. Weingarten Realty, for example, operates shopping malls in the recovering Houston area, while United Dominion owns apartment houses in the mid-Atlantic states. Mortgage REITs, which lend to real estate owners, have been less successful investments; ditto hybrid REITs, which both invest and lend.
You buy REITs through a stockbroker. The prices of the leading trusts are listed on one of the stock exchanges. What's especially exciting income investors is that equity REITs currently pay dividends in the 5 percent to 7 percent range.
But is the party over? As usual, opinions are mixed. Here's what's been driving prices up, according to REIT analysts:
* Due to the long real estate recession, REITs have been able to acquire good properties at low prices. The cash flows from these properties are much higher than the REITs' cost of funds, so there's a built-in profit every time they buy.
* The property recession is finally drawing to a close. In most areas, the value of apartment houses and shopping centers is moving up; industrial properties should follow, with office buildings bringing up the rear.
* There's eager demand for the new public offerings that brokerage houses are churning out. So far, their prices have always gone up. But the quality of these new REITs is starting to show signs of wear, says Barry Vinocur, editor of the Realty Stock Review in Shrewsbury, N.J.
* Investors are flocking to the real estate funds that buy REITs. Fidelity's Real Estate Investment Portfolio, a Boston-based no-load fund, leaped from $95.3 million in assets last September to $495.5 million in March, partly because of the booming market for real estate shares but also because new money is pouring in. In the 12 months ending March 31, Fidelity's fund rose 33.5 percent.
* Mutual funds that don't normally buy real estate shares are also snapping up REITs, for their big dividends and speculative price gains. That's a lot of money chasing not enough stocks. If these funds decide to dump an issue, its price could take a pasting.
Can double-digit price gains continue? A confident "yes" comes from Martin Cohen, of the no-load mutual fund Cohen & Steers Realty Shares (up 42.5 percent for the year ending March 31, with a 5 percent dividend yield). Mr. Cohen, who correctly called the bottom of the market for real estate stocks at the end of 1990, thinks the bull market has another three to five years to run.
His fund, which normally requires a minimum investment of $100,000, will be available for just $2,000 through the end of May, from the brokerage house Charles Schwab.
Assuming that economic growth continues, Mr. Cohen expects rents and cash flows to rise, and REIT dividends to grow at an above-average rate.
A "no" vote comes from Sam Lieber, president of the no-load Evergreen Global Real Estate Equity Fund in Purchase, N.Y. (up 29 percent over the past year). "There's a good chance that you're at the top of the REIT market," he says -- because it's going to take a while for rents and cash flows to go up. He is putting more money into real estate stocks abroad where the markets, he says, are just starting to turn up.
Barry Vinocur's bottom line: If you want a real estate investment, choose mutual funds and plan to hold for several years. Buy more if prices drop.
1993, Washington Post Writers Group