REITs Find 'Perfect Storm' to Ride Real Estate Wave

By: Jeff Cox
CNBC.com Senior Writer

Low interest rates and an improving jobs picture have given real estate investment trusts a boost that makes them an attractive alternative to stocks and bonds.

Commonly called REITs, the trusts have underperformed stocks this year just slightly but face strong prospects going forward as the two critical factors propelling the commercial real estate market continue to take hold.

REITs invest across a broad array of sectors, from office buildings to shopping malls and hotels. There also are health care, timber and infrastructure REITs. They are required to distribute 90 percent of their taxable income to investors through dividends.

"That really is a perfect storm that's very good for REITs," says Rick Romano, co-manager of the Prudential Global Real Estate Fund in Newark, N.J. "It will mean the economy isn't growing fast enough to add new supply and for rates to increase, but we have enough jobs growth so vacancies are starting to push rents."

Ironically, it is the tepid but steady pace of job growth — less than 150,000 per month — that creates a Goldilocks environment where the jobs picture is not too hot so as to drive home-buying but just hot enough to propel rents higher.

"If we can stay around 100,000 to 200,000 (new jobs) a month, we think that's kind of a good backdrop for REITs and real estate," Romano says.

The MSCI REIT Index has gained about 6.5 percent in 2012 after rising 8.7 percent the previous year.

Jeff Cox
Senior Writer
CNBC.com

Industrial REITs have done best, gaining 15.5 percent, while hotels are up 11.4 percent and shopping centers about 11 percent, according to the National Association of Real Estate Investment Trusts.

That compares to stocks, where the Standard & Poor's 500[.SPX  1358.04    14.81  (+1.1%)   ] has gained 7.4 percent, and Treasurys, which have lost about 2 percent.

But the $200 billion U.S. REIT market doesn't face quite the same challenges as stocks and bonds, and offers an attractive dividend at about 3.6 percent industrywide.

The real estate sector, struggling thought it may be, boasts strong support from government policy makers — the Federal Reserve  has pledged to keep rates low — and faces less danger from headwinds such as the sovereign debt crisis in Europe.

S&P on Wednesday reiterated its "stable" outlook on REITs and said they should do better than home builders this year. Making that view even more positive is that sentiment as registered by the National Association of Home Builders has hit its highest level since May 2007, according to data released Wednesday...

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