Market capitalization of REITs reached $330 billion by December 2005, according to data published by the industry association, NAREIT.

Although REITs have been around since the 1970s, this market sector only began to become important in the 1990s, as the graph, at the end of this article, shows.

Market capitalization of the REIT sector is still small compared to the equity market ($11.2 trillion) and mutual funds ($6.4 trillion), and is of a similar order of magnitude as closed-end funds ($278.2 billion) and exchange-traded-funds ($321.6 billion).

Although the REIT sector got off to a rocky start and earned a bad name in the 1970s, when large commercial banks recklessly set up REITs to hold construction loans, causing substantial losses to investors, the business now has been reorganized and is focused on owning and operating large scale commercial properties for the long-term, rather than short-term speculative real estate financing.

Investing the Old-Fashioned Way

For investors who are fed up with the stock buyback-option games and other unethical shenanigans of the main equity market, REITs are a breath of fresh air:

• REITs, in order to qualify for exemption from income taxes, earn and distribute 90% of their income from ‘passive’ sources, such as rents, interest, and property sales. Their operational structure discourages stock buybacks and executive option schemes, while eliminating the double taxation of dividends that plagues the traditional equity market.

• Property REITs, now the most popular segment of the market, invest in large scale, professionally managed portfolios of commercial and residential properties, focusing on current income and long-term asset appreciation. Direct investment in real assets allows REITs to provide greater protection against inflation than bonds.

• A carefully selected portfolio of property REITs has the potential to provide investors with diversified ownership of prime income producing real assets of various types, with broad geographical distribution.

• The shares of REITs are traded on exchanges and registered with the SEC.

• Financial reporting of REITs is more transparent and easier to understand than financial reports of most large commercial and industrial stocks traded on the exchange.

Because of high cash yields and real protection against inflation, property REITs today have similar investment characteristics to common stocks fifty years ago before mass marketing of mutual funds led to over-pricing.

As Baby Boomers retire and as the main equity market goes through an expected readjustment, the REIT market is likely to reap the benefit of being one of the few havens offering reasonable cash yields combined with inflation protection, risk diversification, and liquidity.

Flow of Funds Tables: Limited Usefulness for REITs

For reasons that are not readily apparent, the Federal Reserve funds accounts for REITs are less useful than the statistics provided by NAREIT.

This entry was posted on Sunday, June 25th, 2006 at 10:51 pm and is filed under Fund Shares, Fund Managers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

|