"Our stance on this sector is to focus on REITS that have their holdings in areas where family home ownership is always difficult, like New York City, California, etc.," Martin says. AvalonBay, which has some 200 apartment communities in what it calls 16 "high barrier-to-entry markets characterized by a low supply of zoned apartment land and lengthy and contentious entitlement processes," is focused on the Northeast, Mid-Atlantic, Midwest, Pacific Northwest and California regions. "They benefit from good management a good balance sheet and a portfolio of what we call 'modey' demographics," Martin explains.
For investors who don't feel equipped to do the research necessary to analyze individual REITs, there are of course REIT mutual funds, which allow the investor to make plays in specific real estate sectors, without having to check out individual companies.
"REITs have had a couple of good years, so people have gotten into a more defensive posture now," Morningstar REIT fund analyst Rob Wherry, says. At the same time, he adds, it makes sense for people to hold real estate in any portfolio as a form of diversification. "You only want it to be a few percentage points," he says, "but REITs can certainly play a role." With that in mind, he suggests two funds: ING Global Real Estate (IGLAX) and Vanguard REIT Index (VGSIX).
"I like ING Global Real Estate because of their below-average expense, and their veteran management team," Wherry says. The fund, he notes, has a 10-year annualized return of 10.2%, which beats the global REIT category average of 8.9%. "They also did well even when real estate went out of favor."
As for Vanguard's REIT Index Fund, Wherry says, "This fund, which has apartments, offices, health care and hotel REITs, provides an opportunity for anyone to invest in real estate who doesn't have time to hunt for a fund manager." The fund's return over 15 years has been an annualized 9.6%, right on a par with the REIT average performance of 9.5%. Meanwhile, the fee of .42% is "rock bottom." Says Wherry: "This is one of the better funds we're rating.
With REITs as an industry on fairly solid footing, and with the U.S. economy showing at least modest signs of recovery, there is the potential for excellent performance in most categories of the real estate market.
As analysts point out, demand for office space, mall space and higher-end apartments could grow rapidly, and rental income along with them, if the economy improves and jobs rebound over the coming year or two.
"The big question," says Morningstar's Wherry, "is what happens to Europe, and whether that could lead to investors heading for safer havens like bonds." And, he warns, "If the U.S. recovery, weak as it is, is derailed, that could hurt REITs."