Rarely does a week go by without someone publishing a list of real estate markets that are recession-proof, or that have recovered already, or that they predict will recover sooner than others.
I recently read such a list headlined Housing Market: Best Recovery Bets and was struck by the relatively dismal stats that now qualify a market for Best Recovery Bet status. Included were cities that landed their Best Recovery Bet status by virtue of a projected 2.5% market gain by Q3 2012. Oh, how the mighty (market) has fallen.
Or maybe not. Maybe the issue is at least partly definitional. When we think of the real estate market, or even real estate investing, almost everyone envisions cities and homes. That limited thinking might be blinding us to the markets that are really thriving, achieving gains right now that rival the bubblicious gains we all remember from 2006 and thereabouts.
They’re not regions or cities or even super-performing neighborhoods – they’re Real Estate Investment Trusts, or REITS.
REITs are companies that invest in and manage income-producing real estate – everything from shopping malls to apartment buildings. Shares in REITs are publicly traded securities, which gives individual investors like you and me the ability to participate in these large-scale real estate investments. REITS have massive tax advantages, and must pay out 90% of their taxable net income to shareholders every year to maintain them, rendering them attractive to dividend-seeking investors. REITs tend to specialize in a certain category of property, and have the cash and the professional management that has allowed many to thrive throughout the real estate recession – even taking advantage of low real estate prices to bolster their future prospects by gobbling up discount properties.
Overall, REITs returned an average of over 28 percent in the last two years. Here are a few categories of REITs that have seen similarly striking returns during a supposedly dismal real estate market:
- Self-Storage REITs: The decrease in homeownership rate logically leads to the need for more rental storage – foreclosed homeowners and renters are bursting at the seams of their rental homes. This category of REITs has already gained 18.4 percent so far this year, and they’ve returned 29 percent to investors over the last 12 months.
- Healthcare REITs: Boomers are aging, the Obama health care plan is increasing the numbers of Americans who have insurance – together, these things bolster the long-term need for healthcare facilities. Healthcare REITS, of course, own healthcare properties. In April (the last report I could find), the SNL US REIT Healthcare Index had a 12-month total return of 18.2 percent, and a 10-year total return of 460.1 percent (compared to the S&P 500’s 10-year total return of 43 percent).
- Multifamily REITs: This sector, which owns and operates large apartment complexes, has taken off exactly as you might imagine. Former homeowners and renters who would buy but for tight lending guidelines or concerns about the market have caused the rental vacancy rate to decrease from 8 percent to 6 percent in the last year. Average apartment rents have risen 6 percent since 2006 and are projected to increase another 3 percent in 2011. Add that to the record-high affordable prices and interest rates at which these REITS can buy their properties, and you can understand how data analyst SNL Financial found that multifamily REITs had median year-over-year growth in funds from operations (FFO) of 9.8 percent in the first quarter of 2011.
I’m not saying that REITS in these categories are necessarily going to repeat those gains, or that you ought to invest in REITS at all. But it’s worth noting that fairly simple and logical rationales underlie the recent success of all these REIT categories — and that, despite the general malaise, not all real estate “markets” are created equal.