Real Estate
Investments
Prospering Despite Downturn
By Andrew Leckey
Been
down so long it seems like up to you?
Take heart. Despite
the disastrous performance of this year's stock market due to
accounting scandals and weak earnings, there is an investment
that has prospered.
Real estate investments,
including homebuilder stocks, real estate investment trusts (REITs)
and real estate mutual funds, have posted steady gains during
an otherwise dismal year.
For example, the average
stock REIT is up 10 percent in value, compared to the 20 percent
decline of the Standard & Poor's 500. REITs also have an
average dividend yield of 6.5 percent, versus 1.5 percent for
the average S&P stock.
In just a dozen years,
the REIT market has mushroomed from $9 billion in assets to $170
billion. These publicly traded companies, which own commercial
real estate that ranges from apartment buildings to shopping
malls and hotels, are required to pay out 90 percent of their
income in the form of dividends to shareholders.
Average investors must
keep in mind that property will always be subject to cycles,
bubbles and interest rate stress. Still, recent success is encouraging.
The top real estate mutual funds have positive three-year annualized
returns and are increasingly mentioned as a means to diversify.
Sales of new homes
are well ahead of last year's pace, boosting the stock of homebuilders.
Hovnavian Enterprises Inc. (HOV), whose stock is held in a number
of real estate mutual funds, is up 63 percent this year.
That company designs,
constructs and markets single-family homes, condominiums and
townhouses in 172 communities in the Northeast, North Carolina,
Washington, DC, Southern California, Texas and the Mid-South.
Average sales price of its homes is $255,000, based on prices
from $43,000 to $950,000. The firm also provides mortgages and
title insurance for homebuilding customers.
"Homebuilding
has been a great stock sector, as the Federal Reserve has realized
that low interest rates are its one vehicle for keeping the economy
going," said Samuel Lieber, chief executive officer of the
Alpine Funds, whose U.S. Real Estate Equity Fund is up 23.61
percent this year. "With inflation at 1.5 percent, home
prices are up 5.3 percent in the last year."
Many homebuilders have
gone national, making it easier for them to gain access to public
debt markets. They're also actively buying up smaller builders.
"Homebuilders
are showing themselves to be growth companies and should continue
to have growth of more than 20 percent," predicted Ken Heebner,
portfolio manager of CGM Realty (CGMRX) in Boston, up 21.28 percent
this year with a portfolio that's half homebuilder stocks. "Regions
doing best are California, Washington, DC, Baltimore, eastern
Pennsylvania and New Jersey."
Chelsea Property Group,
a REIT popular with mutual fund managers, is up 37 percent this
year. It develops, owns, leases and manages upscale manufacturers'
outlet centers, with 59 centers in 29 states. With 700 tenants
in 2,900 stores, it has 12.6 million square feet worth of lease
space.
"It's
been almost like a mirror image the past two years, with the
Nasdaq collapsing and REITs doing really well," observed
Jim Sullivan, managing director and senior real estate analyst
with Prudential Securities. "REITs are a classic defensive
value investment, the sort of tangible assets you can put your
arms around and which make it easy for an investor to understand
the underlying story."
Leiber's funds have
seen strong gains from homebuilders Standard Pacific (SPF), up
29.8 percent, and Hovnavian. His REIT winners have been hotel
investor La Quinta Corp. (LQUI), up 25 percent, and Chelsea Property
Group. Foreign names that have done well include the hotel stocks
NH Hoteles of Spain, Societe de Louvre in France and Millennium
& Copthorne Hotels in the United Kingdom.
Meanwhile, Heebner
owns the stock of homebuilder and mortgage banking firms NVR
Inc. (NVR), up 57 percent; Ryland Group, up 38 percent; D.R.
Horton, up 18 percent; and Hovnavian Enterprises. Other leaders
are Entertainment Properties Trust (EPR), up 28 percent; General
Growth Properties (GGP), up 29 percent; Alexandria Real Estate
Equities (ARE), up 19 percent; and Chelsea Property Group. Among
REITs, Sullivan currently recommends hotel owners FelCor Lodging
(FCH) and Meristar (MHX), as well as industrial property company
AMB Property Corp. (AMB) and corporate rental property firm Duke
Realty (DRE). He also suggests shopping mall companies CBL &
Associates Properties (CBL), General Growth Properties (GGP)
and Simon Property Group (SPG).
The top-performing
real estate mutual funds this year, according to the Morningstar
Inc. research firm, have been:
- Security Capital European Real Estate (SEUIX), Chicago; $11.5 million in assets; "no-load" (no sales charge); $2,500 minimum; 888-732-8748; three-year annualized return of 7.20 percent; up 28.96 percent.
- Alpine U.S. Real Estate Equity Y (EUEYX), New York; $49 million; no load; $1,000; 888-785-5578; three-year annualized return of 14.92 percent; up 23.61 percent.
- Alpine International Real Estate Y (EGLRX), New York; $39 million; no load; $1,000 minimum; 888-785-5578; three-year annualized return of 2.72 percent; up 20.57 percent.
- CGM Realty (CGMRX), Boston; $434 million; no load; $2,500 minimum; 800-345-4048; three-year annualized return of 14.99 percent; up 21.28 percent.
- Alpine Realty Income & Growth Y (AIGYX), New York; $22 million; no load; $1,000 minimum; 888-785-5578; three-year annualized return of 17.58 percent; up 16.67 percent.
