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REIT popularity grows, despite shrinking returns

July 10, 2012 02:15PM

Growth of $10,000 over last three years in the Vanguard REIT Index

Though real estate investment trusts’ returns are diminishing, they’re not losing any popularity among investors because so many other investment vehicles are actually in negative yield territory, according to the New York Times.

The latest figures from the National Association of Realtors and CoStar show residential and commercial property prices have gained 7.9 percent and 6.5 percent, respectively, in the last year. As a result, the Vanguard REIT Index returned 2.8 percent in the second quarter and real estate mutual funds returned 3.5 percent.

Meanwhile, the S&P 500 declined 3.3 percent and 10-year Treasuries yielded next to nothing. With signs abound that a real estate recovery is on firmer footing, many investors are turning to the sector for profit.

“REITs are getting so much play in the marketplace because they’re a good bond alternative,” said Jeffrey Leventhal, a partner at financial advisory firm HighTower. “More important, they’re a diversifier in a portfolio because they move with bonds instead of stocks.”

However, some analysts warn that the flight to higher yields means REIT shares are no longer priced inexpensively. They have been trading at about a 12 percent premium to net value of assets, well above their historical 3 percent average. [NYT]