One thing you can say about the 1%: They know a bargain when they see one.

That seems to be at least one underlying explanation for a key finding of a new survey just released by Spectrem Group, a Chicago-based consulting firm that specializes in research on the ultra-affluent.

The new study, entitled "REITs Remain the Most Popular Alternative for UHNW Investors," reports that at least when it comes to the category of alternative investments, 18% of ultra-high-net-worth investors with assets of between $5 million and $25 million to invest during the fourth quarter of 2011, favored real estate investment trusts as their main alternative investment. That was followed by private placements for only 9% of this investor category. Then came the 8% who favored hedge funds, 7% who favored futures, and just 2% who favored venture capital stakes. Fully one-third of all ultra-high-net-worth investors reported holding REITs in their portfolios. It's a figure that seems destined to rise.

"Ultra-high-net-worth investors tend to have a pretty aggressive risk tolerance," explains Tom Wynn, a director of affluent research at Spectrem Group. "They have always tended to like real estate because they are concerned about inflation and see real estate as a way of protecting against it." He suggests that the decline in property values, including commercial property values, "may have people feeling that it is time to buy low in real estate."

REITs, Wynn explains, offer them a way to invest in property that at the same time gives them the flexibility to get in and out of the market (there are currently 142 REITs that are traded on the New York Stock Exchange, and average daily trading in REITs in December 2011 was $3.4 billion). The average REIT balance for this investor group at the end of 2011 was $492,000.

Less affluent millionaire investors, and investors who are not even millionaires, are also investing in REITs, the study reports, and they are showing a preference for this particular asset category over other alternative investment options.

REITs, Wynn points out, which the government requires to pay out 90% of income to investors as dividends, are popular among investors in part because of their high and reliable dividends. Except for a brief period in late 2008 and early 2009, when many REITs temporarily halted their dividend payments and when all stocks suffered brutal losses, the total return for REITs has been almost double the total return for the S&P Index and the Russell 2000 Index. The Spectrem study reports that 33% of ultra-high-net-worth investors responding to the survey claimed they invested in REITs because of the dividends.

"The strong, continuing income stream from REITs is an important component of the appeal of REIT shares for investors," says Steven A. Wechsler, president and CEO of the National Association of Real Estate Investment Trusts (NAREIT), the REIT industry trade group. "REIT dividends boost an investment portfolio's performance in good times and help insulate it from downside shocks in turbulent market conditions."

Last year, REITs showed a gain of 8.28%, outperforming the S&P's 2.11% by a factor of nearly four. This followed a 27.95% REIT index gain in 2010 and a 27.99% gain in 2009, according to NAREIT. That compares favorably to the S&P Index gains of just 15.6% in 2010 and 26.46% in 2009. Nearly half of the REIT gain in 2011, which was 3.82%, came in the form of dividend payouts.

Several REIT market sectors showed double-digit gains in 2011. The leading sector was the booming self-storage properties category, which benefited, ironically, from the record nationwide wave of bankruptcies.

Self-storage REITs had an average total return in 2011 of 35.22%. This was followed by the apartment sector, with a 15.10% gain, again benefiting from the ongoing weakness in the single-family housing market. Health care REITs were up 13.63%, followed by retail, which was up 12.2%, primarily because of the sub-category of retail malls, which were up 22.00%. Timber REITs showed a 7.65% gain for the year, while diversified REITs gained just 2.82%.

The poorest performing REIT sector was lodging and resorts, down 14.31%. It was a victim of the recession and lowered demand for vacations. Industrial REITs were down 5.16%, mortgage REITs were lower by 2.42% and office REITs dipped by 0.76%.

The top performing REIT in 2011 was a self-storage REIT, Extra Space Storage Inc. (EXR), a $2.4 billion company with 676 storage properties that boasted a one-year return of 41.8%. Three of the top 10 performers for the year were self-storage REITs. Specialty REITs claimed four of the top 10 spots, including the second-ranked Education Realty Trust Inc. (EDR), with a 41.0% gain. Mission West Properties Inc. (MSW), an office REIT, was third with a 40.2% gain. Rounding out the list was a regional mall REIT and a multi-family property REIT.

While the survey found that investors have been increasingly putting REITs in their alternative investment basket, they have remained relatively cautious about their overall investments. "We're still seeing a portion of ultra-high-net-worth investors who are in cash and fixed income, just because of the volatility of the market," Spectrem's Wynn says. "There's still some angst about investing among these people." Over all, ultra-high-net-worth investors are putting an increasing share of their assets into equities, he says. "Sixty-three percent said they are likely to invest in equities this year, and only 18% in alternatives, whether REITs, hedge funds or private placements," he says.

They are also getting more interested in global investing. While 44% of ultra-rich investors reporting having "no interest" in investments outside the U.S., Wynn says 35% said they planned to invest overseas over the next 12 months.

NAREIT spokesman Ron Kuykendall says that in addition to REITs' total return including dividends, many wealthy investors may be starting to think it's a good time to buy these products for another reason. "Last year was a record year for REIT capital raising," Kuykendall says, adding that $51.2 billion was raised, including $31 billion in equity, $4.1 billion in preferred shares and $13.8 billion in debt. That beats the prior record of $49 billion raised in 2006.

Kuykendall notes that the industry's debt ratio is currently reasonable, at about the historical average of 40%. His conclusion: "There's a lot of dry powder now that this industry can use for acquisitions." At the same time, Kuykendall points out that there are also a lot of acquisition targets. Much of the real estate debt in private hands (most of it five-year debt) is coming due this year, and with property values so low, he says, "it will be hard for the owners to refinance, so there will be a lot of distressed sales, with well-capitalized REITs in an excellent position to buy them." He predicts, "2012 should be a big acquisition year for REITs." At present, 15% of commercial property is owned by REITs, with 85% held in private hands.

As of February 1, Spectrem says, REITs, including both commercial and industrial REITs and residential property REITs, were managing a total of $407 billion worth of property assets and owned another $500 billion of real estate assets.