Tài liệu INVESTING IN REITs PART 3 ppt

history
And Mythology
P A R T
C H A P T E R
REITs:
MYSTERIES
AND MYTHS
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T
here’s no question about it: In spite of their growing
acceptance, there have been lingering mysteries and myths
that REITs haven’t been able to shake off. This chapter
addresses these misconceptions and lays the fading myths to rest
once and for all.
C H A N G I N G A T T I T U D E S
T O W A R D R E I T S
For many years, REITs were regarded as odd and uninteresting
investments. Even their unusual name—REIT—implied that the
standard criteria applicable to most investments didn’t apply to
them. Bruce Andrews, the former CEO of Nationwide Health
Properties, noted that the term trust, as in real estate investment
trust, implies that REITs are oddities, that they are not like normal
corporations whose shares are traded on the stock exchanges. One
of the main reasons that REIT stocks were suspect for so long is
that many people who traditionally invested in real estate didn’t
really understand—or trust—the stock market, while most people
who invested in the stock market were uncomfortable with, or had
little understanding of, real estate. REITs just didn’t fit into either
category and therefore fell between the cracks.
All this has finally changed. In October 2001, Standard & Poor’s
admitted the largest REIT, Equity Office Properties, with an equity

market cap at that time of $12 billion, into the S&P 500 index.
Equity Residential Properties Trust, the largest apartment REIT,
was admitted soon thereafter, and at the end of 2004, there were
seven REITs in the S&P 500. At the end of 2000, when the equity
market cap of all REITs was $139 billion, many REIT observers
believed that, within ten years, REITs’ total market cap would
reach $500 billion. Well, at the end of 2004, that figure had already
exceeded $300 billion.
Of course, the growth in the REIT industry will wax and wane
from time to time. And there are lots of good reasons why many
investors might want to own real estate directly, not via an invest
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ment in a REIT. Nevertheless, the advantages of ownership through
a REIT are very substantial, and the size of the REIT industry will
continue to grow with increased investment by both individuals and
institutions who appreciate REITs’ liquidity, substantial informa
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tion disclosure, and opportunity for wider diversification among
property types and geographical locations. And, it seems, public
scrutiny of some of the largest commercial property owners in the
U.S., the REITs, may be causing real estate to become less cyclical
and thus more valuable. Weakness in most real estate markets and
property sectors from 2001 through 2004 resulted from a major
slackening in demand due, in large part, to a national recession, a
subsequent boom in single-family residences, and severe cutbacks

of capital spending by businesses, not the overbuilding that’s been
the main culprit in prior real estate cycles. Perhaps operating in a
fishbowl, as public REITs do, imposes substantial development dis
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cipline, which even carries over to the private markets.
THE B IAS OF TRADI TIONAL R EAL E STATE IN VESTORS
Traditionally, most real estate investors have chosen to put their
money directly into property—apartment complexes, shopping
centers, malls, office buildings, or industrial properties—and not in
real estate securities like REITs. In other words, bricks and mortar,
not stock certificates. Direct ownership historically has provided the
opportunity to use substantial leverage, since lenders have tradi
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tionally been willing to lend 60–80 percent of the purchase price of
a building. Leverage is a wonderful thing—when prices and rents
are going up.
Since the Great Depression, real estate values pursued a profit
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able upward bias, notwithstanding a few potholes along the way.
Appreciation of 10 percent on a building bought with 25 percent
cash down would generate 40 percent in capital gains. In addition,
owning a building directly provided the investor with a tax shelter,
via depreciation expenses, for other operating income. As a result,
real estate continued to appreciate and provide easy profits, and
most real estate investors tended to focus on what they knew—
direct ownership.
Many individual real estate investors harbored a distrust for
public markets (REITs included), which they saw as roulette tables
where investors put themselves at the mercy of faceless managers—
or worse, speculators and day traders whose income depended

on volatility. These investors saw REITs as highly speculative and
wouldn’t touch them.
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Then, of course, there was institutional investment in real estate.
Originally, institutional and pension funds earmarked for real
estate were invested in properties either directly (where their own
property managers and investment managers were retained), or
through “commingled funds” in which big insurance companies
and others used funds provided by various institutional investors
to buy portfolios of properties. Who managed these properties,
supervised their performance, and answered for their results?
The same sort of real estate investors who, of course, didn’t trust
the stock market—or, if they had no such qualms about equities,
didn’t believe that the performance of REIT shares would match
that of direct real estate investments.
Furthermore, since REITs are traded as common stocks, the
result was—catch-22—that a decision to invest in REITs could
be made only by the “equities investment officer” rather than the
“real estate investment officer” of the institution or pension fund.
The institutions’ common stock investment funds were placed and
monitored elsewhere. Furthermore, various investment guidelines
often precluded the equities investment officers from investing in
REITs—even if they knew about them and wanted to pursue this
sector of the market. And why should they bother? After all, REITs
have always been a very small sector of the equities market and were
not included in the S&P 500 index until 2001.
A further discouragement has been volatility. Real estate inves
-

tors have complained that REITs, even though traditionally less
volatile than the broader stock market, nevertheless do fluctuate in
price. However, to be fair, any asset fluctuates in price. With illiquid
assets that were held, not traded (and by relying upon occasional
appraisals), the private-fund managers could maintain the illusion
that the values of their assets were “steady as a rock,” despite the
continuous ebb and flow of the real estate capital markets. Every
asset fluctuates in value, but owners are sometimes unaware of these
changing valuations until they try to sell the asset.
Finally, institutions buy and sell stocks in large blocks, and it’s
been only recently that REIT shares have had sufficient liquidity
to attract institutional investors. In fact, one of the most oft-quoted
reasons why pension funds have been reluctant to invest in REITs is
their lack of liquidity. The REIT market was so thinly traded prior
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to 1993–94, when the size of the REIT market began to expand
geometrically, that it would have been extremely difficult for an
institution to accumulate even a modest position without disrupting
the market for any particular REIT stock.
THE B IAS OF COMMO N STO CK INVES TORS
What discouraged common stock investors from buying REITs? The
flip side of the coin is that REITs’ only business is real estate and
stock investors didn’t invest in real estate; they focused primarily
on product or service companies. Real estate was perceived as a dif
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ferent asset class from common stock; this problem was particularly
acute in the institutional world.
REITs have also been perceived as real estate mutual funds, and

not as active businesses—a perception precluding REITs from
being admitted to the S&P 500 until 2001. An IRS ruling at that
time confirmed that REITs are active businesses, but old percep
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tions die hard.
In addition, the public perception—wrong as it was—was that
REITs were high-risk but low-return investments. There were many
investors who had bought construction-lending REITs and real estate
limited partnerships in the 1970s and 1980s and gotten badly burned.
These investors did not take the trouble to distinguish between these
ill-fated investments and well-managed equity REITs.
Also, for years investors had been told that companies that paid
out a high percentage of their income in dividends did not retain
much of their earnings and therefore could not grow rapidly. Since,
to most common stock investors, growth is the hallmark of success
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ful investing, they didn’t want to invest in a company that couldn’t
grow. Finally, some of the blame for lack of individual investors’
interest in REITs can be laid at the feet of stockbrokers.
REITs for a long time were perceived as stocks by real estate
investors, and as real estate by stock investors.
Until about fifteen years ago, most major brokerage firms did
not even employ a REIT analyst. And, since individual investors
generally bought individual stocks only when their brokers recom
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mended them, the REIT story fell on deaf ears. Mutual funds have
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been popular for many years, but only a handful of mutual funds

were devoted to REIT investments—and those did not advertise
widely. Many of those investors who did their own research and
made their own investment decisions quite likely felt that REITs
were too much of an unknown territory for them to venture into.
Even income investors, for whom REITs would have been particu
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larly suitable, invested primarily in bonds, electric utilities, and
convertible preferred stocks.
REITs, of course, given their favorable investment characteris
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tics, were bound to be noticed sooner or later. They are gradually
but inexorably becoming well known to real estate and common
stock investors alike, and REITs’ long period of being neglected is
now ancient history. Interest in REIT stocks will ebb and flow with
changes in investor fads and preferences, but they are now firmly
recognized as strong and stable investments that help to diversify a
broad-based investment portfolio.
T H E M Y T H S A B O U T R E I T S
In addition to—and sometimes because of—the other obstacles
REITs have had to overcome, some myths exist, myths that in the
past scared off all but the bravest investors. Although these myths
were based on misunderstandings of the investment characteristics
of REITs, they discouraged many would-be investors. Let’s confront
them, one by one.
M Y T H 1
REI TS ARE PACKAG ES OF RE AL PR OPERTIE S
This myth, which probably sprang from investors’ experience
with the ill-fated real estate partnerships of the late 1980s, may be
the single most significant reason for REITs’ failure in the past to
attract a substantial investor following. Although at one time REITs

may have been only collections of properties, or “real estate mutual
funds,” they are much more than that today.
REITs are more than just portfolios of real properties.
Organizations that merely own and passively manage a basket
of properties—whether they be limited partnerships, trusts, or
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even corporations—must contend with several specific investment
concerns. Management is generally not entrepreneurial and thus
is often unresponsive to small problems that can, if left unattend
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ed, develop into big problems. Also, management does not usu
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ally have its compensation linked to the success of the properties
and therefore has no particular incentive to be innovative despite
today’s competitive environment. Often, there is no long-term
vision or strategy for creating value for the investors. Finally, inef
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ficient management rarely has access to attractively priced capi
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tal, making it difficult for the entity to take advantage of “buyers’
markets” or attractive purchase or development opportunities. An
investment in such a passive company, although perhaps provid
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ing an attractive dividend yield, offers little opportunity for growth
or expansion beyond the value of the original portfolio.
Conversely, a large number of today’s REITs are vibrant, dynamic
real estate organizations first, and “investment trusts” second. They
are far more than collections of properties. Their management is

savvy and highly motivated by their own ownership stake and other
equity incentives. They plan intelligently for expansion either in
areas they know well or in areas where they believe they can become
dominant players, and they frequently have access to the capital nec
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essary for such expansion. They attempt to strengthen their rela
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tionship with their tenants by offering innovative and cost-efficient
services. To categorize highly successful real estate companies, such
as AMB Property, Alexandria, Archstone-Smith, Avalon Bay, Boston
Properties, the “Equities,” General Growth, Kimco, Home, Macerich,

Reckson, SL Green, Simon, Taubman, Vornado, or Weingarten, to
cite just a few examples, as just collections of properties, or “mutual
funds of real estate,” is to underestimate them seriously. Yet this myth
still persists, even among some institutional investors.
M Y T H 2
REA L EST ATE IS A HIGH- RISK INVESTM ENT
It’s amazing how many people believe that real estate (other than
one’s own home, of course) is a high-risk investment through which
investors can be wiped out by tenant defaults or declines in prop
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erty values. And, they surmise that if real estate investing is risky,
then REIT investing also must be risky. Let’s analyze risk here.
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Three essential determinants of real estate risk are leverage,
diversification, and quality of management (including the assets and
property locations chosen for ownership by such management).

◆
Leverage.
Leverage in real estate is no different from leverage
in any other investment: The more of it you use, the greater your
potential gain or loss. Any asset carried on high margin, whether
an office building, a blue-chip stock, or even a T-note, will involve
substantial risk, since a small decline in the asset’s value will cause
a much larger decline in one’s investment in it. However, because
real estate historically has been bought and financed with a lot of
debt, many investors have confused the risk of debt leverage with
that of owning real estate.
Although real estate investments have often been highly lever-
aged, it is the high leverage rather than the real estate that is the great
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est risk.
In fact, one could argue that if lenders will lend a higher percent-
age of a real estate asset’s value than the Federal Reserve will allow
banks and brokers to lend on a stock investment, then real estate
must be less risky than stock investments.
◆

Diversification.
Again, the same rule that applies to other invest-
ments applies to REITs: Diversification lowers risk. People who
would never dream of having a one-stock portfolio go out and
buy, individually or with partners, a single apartment building or
shopping center. Things happen—an earthquake, neighborhood
deterioration, excessive building, a recession—and all of a sudden
the building is sucking up money like a sponge. Never mind that
O N E C O M M O N M I S C O N C E P T I O N

WHEN ONE REIT encounters difficulty, investors sometimes rashly
conclude that REITs as an asset class are very risky. Yet no one would
condemn the entire stock market just because the price of one stock
had collapsed.
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a similar apartment building in another location is doing well, or
that an office building upstate is raking in cash. Diversification
should be the mantra of every investor.
◆

Management quality.
Then, of course, there is the issue of man-
agement. Good management is crucial—but that is not only true
in real estate. If you look around at major U.S. non-REIT corpora
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tions, you can see, for instance, the value of a Jack Welch to General
Electric, or how Bill Gates’s vision brought Microsoft to where it
is today. Incompetent management can ruin a major corporation
or a neighborhood candy store. Real estate, like all other types of
investments, cannot simply be bought and neglected; it requires
active, capable management. And good management teams are
able to select real estate for acquisition and ownership that is likely
to appreciate, not depreciate, over time. Despite this, many other
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wise intelligent investors have bought apartment buildings, small
offices, or local shopping centers, often in poor locations, and tried
either to manage them themselves in their spare time or to give
control to local managers who have little incentive to run the prop

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erty efficiently. What happens? The apartment building or strip
center does poorly, and the investor loses money and jumps to the
wrong conclusion—that real estate is a high-risk investment.
M Y T H 3
REAL ESTATE’S VALUE IS ESSENTIALLY
AS AN INFLATION HEDGE
Real estate is really nothing more than buildings and land, and, like
all tangible assets (whether scrap metal, oil, or used cars), its value
will ebb and flow with local, national, and even global supply and
demand. However, inflation is only one factor that affects market
prices; others are national and local economic conditions, interest
rates, prices of—and return expectations for—other assets and
investments, unemployment levels, consumer spending, levels of
new personal and business investment, supply of—and demand
for—space, government policies, and even wars.
Part of the reason for the real-estate-as-inflation-hedge myth may
come from the fact that real estate happened to do well during the
inflationary 1970s, while stock ownership during the same period
was not as productive. This, quite likely, was a simple coincidence.
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According to Stocks, Bonds, Bills, and Inflation 1995 Yearbook, pub-
lished by Ibbotson Associates, equities have been very good inflation
hedges over many decades. So has real estate. But the reality is that
neither the real estate market nor the equity market is substantially
better or worse than the other in this regard.
Yes, there are times when inflation appears to help the real estate
investor by boosting the replacement cost of real estate, but such

inflation can also increase operating expenses such as maintenance,
other management costs, insurance, and taxes and thus restrain a
property’s net operating income growth, which could negatively
affect its market value.
The value of a commercial building is determined essentially
by three principal factors: the net operating income the owner derives,
or is expected to derive, from the property; the multiple of that income
that the buyer is willing to pay for it (which, in turn, is based upon a
myriad of factors); and its replacement cost. And these factors fluctuate
in response to various market forces; the expected rate of inflation is
only one of those forces.
High inflation can positively or negatively affect rental rates and
net operating income. A positive influence resulting from inflation,
at least in the retail sector, can come from the higher tenant sales
that normally result from increased inflation and higher prices on
goods sold to consumers. Although these higher sales can translate
into higher rents for property owners, this benefit will be short-lived
if the retailers can’t maintain their profit margins. If stores are not
returning profits, it will be difficult for the owners to raise rents.
Similarly, higher inflation can help apartment owners by increas
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ing tenants’ wages and thus their ability to afford higher rents, but
only if wages are rising at least as rapidly as the price of goods and
services.
When supply and demand are in balance, inflation may enable
owners to raise rents because, as the cost of land and new construc
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tion rises, rents in new buildings will have to be high enough to
cover these higher costs. If the demand is sufficient to absorb the
new units that are coming into the market, owners of preexisting

properties will often be able to take advantage of the new proper
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ties’ “price umbrella” and charge higher rents. Real estate is not
an effective hedge against inflation, however, when there is a large
oversupply of competing properties.
Higher inflation rates can also have a negativ
e effect on the value
of real estate, certainly over the short term. The Federal Reserve acts
as a watchdog for inflation, and, when there is a perceived inflation
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ary threat, the Fed will raise short-term interest rates. Higher inter
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est rates are meant to slow the economy, but interest rates that rise
too high can strangle it, causing a recession. Once a recessionary
economy exists, a property owner will have difficulty raising rents
and maintaining occupancy levels, and therefore will not be able to
generate higher net operating income.
Now for the second part of the property-value equation: the mul
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tiples of net operating income that buyers may be willing to pay.
The price of a property is often determined by applying a multiple
to its existing or forward-looking annual operating income (or by
using its reciprocal, the cap rate), but the multiples (or the cap
rates) don’t always stay the same. There is an argument that buyers
will pay more for, or accept a lower cap rate on, real property dur
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ing inflationary periods. Since investors view real estate as a hard

asset, like oil and other commodities, they may be willing to pay a
higher multiple for every dollar of operating income if they per
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ceive that accelerating inflation will lead to higher rents.
The counterargument is that cap rates may indeed be influenced
by inflation, but in reverse. Higher inflation will often drive up
interest rates, which in turn will increase the “hurdle rate of return”
demanded by investors in a property, and have the effect of increas
-
ing the required cap rate and thus decreasing the price at which the
property can be sold. Conversely, property values may rise even with
no inflation whatever, as interest rates decline in a zero-inflation
environment. Property values certainly increased in 2003–04 when
interest rates and inflation were at very low levels. Consider the fol
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lowing example:
If the demand for apartment units in San Francisco exceeds the
available supply of such units, rents will increase and the apartment
building owner’s net operating income will increase. Thus, one
might think that the value of the apartment community would also
rise. However, if this demand for apartment space has been fueled
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by an over-heated economy, which brings on higher interest rates,
the cap rate applied by a potential buyer of the property to the net
operating income might also rise, perhaps even causing a loss in
value of the asset.
On the other hand, if the supply of apartment units in San

Francisco exceeds the demand by renters, as was the case from 2001
to 2004, rents and net operating income may fall—but the value of
the apartment community may nevertheless rise, due to a lower cap
rate applied to that net operating income. And all of this has little
to do with inflation.
It is likely that replacement cost for a real estate asset will rise
during inflationary periods, but this alone won’t increase the prop
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erty’s market value if the profitability of the asset falls short of buy
-
ers’ requirements; it means only that new competing properties are
unlikely to be built until market values exceed replacement cost.
Market factors like supply and demand, along with interest
rates, are almost always more important than inflation in determining
property value. REIT investors should focus more on market conditions
and management ability than on inflation.
M Y T H 4
DIF FIC ULT REAL ESTAT E MAR KETS MEAN
BAD NEWS FOR RE IT IN VESTORS
Real estate has at some times been a terrific investment and, at
other times, a terrible investment. Right now, all available informa
-
tion suggests that real estate, as an asset class, will fare reasonably
well through the rest of the decade.
A favorite observation among stock traders, after a long bear
market that has finally turned around and moved up strongly, is
“The easy money has already been made.” Despite weak real estate
markets from 2001 through 2004, property values held up well due
to real estate’s popularity as an asset class. And now, although a
recovery is under way, it is unlikely that in most sectors of the real

estate industry, property owners will be able to generate growth in
rental rates and operating income much in excess of the rate of
inflation, which is 2–3 percent annually. Some pockets of opportu
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nity will always surface from time to time, but today most real estate
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is in “strong hands,” and distressed sellers are scarce. Thus, the easy
money has been made here, too.
The rapid industrialization and intense competition occurring
today in North America, Europe, Asia, and Latin America seem to
be major and perhaps long-lasting phenomena. U.S. companies
must now go toe-to-toe with foreign competitors virtually every
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where in the world. This, in turn, requires U.S. businesses to be
very cost-efficient. Downsizings, restructurings, outsourcing of jobs,
and layoffs have been the result. Companies are finding it difficult
to raise prices, and employees are finding it equally difficult to get
significantly higher wages. The bottom line for real estate investors
is that, as long as these competitive trends continue, and if excessive
supplies of new developments do not trash real estate prices and
create opportunities for bargain hunters, it will be difficult for them
to generate returns above long-term norms.
Nevertheless, if real estate investors can obtain initial investment
returns of 5–7 percent from property acquisitions and enjoy operat
-
ing income growth in line with inflation, REITs should remain very
solid investments—competitive with other asset classes. Furthermore,
many REITS may, at times, be able to take advantage of opportunities

presented by challenging real estate environments, just as they take
advantage of opportunities in favorable environments.
Excellent managements view difficult conditions and tenant
bankruptcies as opportunities. United Dominion went on a buy
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ing spree during the apartment depression of the late 1980s and
early 1990s, while Apartment Investment and Management and
Equity Residential bought huge amounts of undermanaged apart
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ment communities several years later and spread their operating
costs over a much larger number of units. Nationwide Health and
Health Care Property bought defaulted nursing-home loans from
the Resolution Trust Corporation (RTC) at 16–18 percent yields.
Kimco Realty bought the properties, and even the leases, of trou
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bled retailers and found new tenants willing to pay higher rents. A
number of years ago, Weingarten Realty actually increased its occu
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pancy rates during the Texas oil bust, as many tenants vacated half-
empty locations and migrated to Weingarten’s attractive shopping
centers. More recently, in 1999 Cousins Properties bought The
Inforum, a 50 percent-leased office building in downtown Atlanta,
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for approximately $70 million. It invested an additional $15 million
in improvements and signed a new lease for about 30 percent of the
building. Within approximately two years, it was earning a return
of about 12.5 percent on the total investment. These are but a few
examples of how lemons can be turned into lemonade by imagina

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tive and capable real estate organizations with access to capital.
Conversely, it can also happen that a great real estate market is
bad for REITs. For example, many REITs saw their profit growth
“hit the wall” in the mid-1980s, when real estate prices were sky
-
rocketing. Not only were properties simply not available at prices
that would provide acceptable returns, but owners were also facing
competition from new construction. Before anyone realized what
was happening, the cycle moved into the overbuilt phase and cash
flow growth slowed markedly.
As we’ll see in more detail later, REITs can grow their profits
both internally, through rising operating income, and externally,
through property acquisitions and new developments. Poor real
estate markets may create external growth opportunities if distressed
sellers are numerous, but it doesn’t always happen this way; there
were few distressed sellers during the last real estate recession, and
there were numerous buyers. One never knows how any particular
real estate or capital market cycle will play out, but the point here
is that strong REIT organizations with access to ample capital may
be able to take advantage of opportunities often created by tough
real estate markets. While cash flow growth would slow temporarily
in response to such difficult rental markets, these REITs’ ability, at
certain times, to buy sound properties at cheap prices enables them
to create substantial value for their shareholders.
The extent to which a well-managed REIT can avail itself of the
opportunities presented in a down market depends upon the amount
and cost of available capital, the depth of the market weakness, and the
extent of competition from other buyers.
Some of the best investment opportunities arise when a company

or even an entire industry is overlooked or misunderstood by the
great mass of investors. Legendary investors Warren Buffett and
Peter Lynch made their reputations not by buying the growth stocks
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that everyone else was buying, but rather by taking advantage of
solid companies with undervalued stocks, often caused by investors’
lack of patience or foresight. Buffett’s investment in Wells Fargo
Bank some years ago was but one example among many.
The same principle applies to REITs. REIT stocks are “all-weather”
investments for diversified portfolios, but are particularly attractive
when nobody wants to own them. Investors’ past fears and hesitations
had, for a long time, left these lucrative investments largely undiscov
-
ered and, therefore, undervalued. REITs have become more popular
in recent years, but myths and misconceptions die hard, and one
never knows when investors will again trash them for all the wrong
reasons. Those who understand them are unlikely to follow scared
sellers to the exits.
M Y T H 5
REI T STO CKS AR E FOR TR ADING
How often have you read in a financial magazine or newspaper,
“Is now the time to get into (or out of) REITs?” It seems that we are
always being hit with that inane question. Why is it asked so often?

I believe the reason is the existence of yet another myth that is often
encountered with respect to REITs: That they are meant for inves
-
tors to get into and out of from time to time, perhaps “cyclical”

stocks that must be market-timed if one is to make any money in
them.
This mind-set is, I believe, one of the most dangerous myths of
all. It makes several assumptions, all of which are erroneous. These
include: (a) REIT stocks must be bought and sold at the right time
if one is to do well with them; (b) real estate and REIT stock prices,
market conditions, interest rates, and capital markets can be suc
-
cessfully anticipated and timed by astute investors; and (c) that the
reason for buying and selling REIT stocks is to score big wins and to
avoid equally large losses. Wrong, wrong, wrong!
First, REIT stocks needn’t be bought and sold frequently; indeed,
they are the ultimate “buy and hold” investment. Their total return
performance, averaged over many years, has been outstanding, and
certainly competitive with the broader equities markets. More than
50 percent of their returns to investors come from the dividend
yields, so investors get paid to wait for the additional reward of stock
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price appreciation that comes, over time, with earnings, dividend,
and net asset value growth.
Second, the most wealth has been created by investors who buy
and hold the stocks of excellent companies, for example, Warren
Buffett. There is little evidence that traders or market-timers have
been able to consistently make money in the stock market. And this
is certainly true in REIT world. To successfully time the purchase
and sale of REIT stocks, one must be able to forecast accurately the
direction of interest rates (both long-term and short-term), real
estate markets throughout the U.S., capital flows of both institu

-
tions and individuals, rates of inflation and unemployment, and all
the other factors that determine real estate and stock prices. This
cannot be done consistently and, for 99.9 percent of all investors,
isn’t worth the effort.
Finally, most intelligent investors do not invest in REIT stocks for
quick and sizable capital gains, as one might seek to do in steel, air
-
line, or technology stocks. REIT stocks are best owned for consistent
dividend payments, modest price appreciation, over time, corre
-
sponding to increases in cash flows and asset values, and low correla
-
tions with other asset classes. The investors who do best with REIT
stocks are those who have the most patience, are willing to ride out
the occasional bear market, and are not expecting to hit home runs.
The claim that REIT stocks are best traded but not owned is truly
a myth, and a dangerous one. Intelligent financial planners and
advisers are telling their clients to decide on an appropriate alloca
-
tion to REIT stocks within their diversified investment portfolios
and to stick with them, perhaps rebalancing from time to time to
maintain that allocation. We’ll spend a bit more time on this topic
later in the book.
S U M M A R Y
◆
For years, REITs have been shunned as “common stocks” by real estate
investors and treated as “uninteresting real estate” by stock investors.
◆
Three essential determinants of real estate risk are leverage, diversifica-

tion, and quality of management (including the assets chosen for owner
-
ship by such management).
◆
Although real estate investments have often been highly leveraged, it is
the high leverage, rather than real estate itself, that is the major risk.
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◆
Real estate as an investment can be hurt as much as helped by inflation.
◆
Market factors like supply and demand, interest rates, the existing and
future strength of the economy, and investors’ preferences and available
investment alternatives are almost always more important than inflation
in determining property value. REIT investors should focus more on market
conditions and management ability than on inflation.
◆
Even if the near-term outlook for real estate is not good, REITs with access
to capital will be able, at times, to grow their profits by taking advantage
of favorable acquisition opportunities.
◆
REIT stocks are not “trading vehicles,” and should be owned for dividend
yields and modest capital appreciation over long periods of time.