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.