Business

NEW YORK (AP) ― After a long hot run, real estate investment trusts have cooled off in the last few weeks. Which raises the question: Should investors cash out and take their winnings? Or should they stay in the game?

Real estate investment trusts (REITs) trade like stocks, but act like real estate moguls, buying up properties. Sometimes a REIT focuses on a region, such as the Northeast, sometimes on an asset class, such as apartments, hotels or office buildings and sometimes they do a combination.

Over the last three years, prices for U.S. REITs have appreciated nearly 55 percent, or 15.7 percent a year, according to Prudential Financial. Average annual dividends paid by the REITs were about 7 percent.

So far this year, their performance is less astounding, but still better than the rest of the stock market. Standard & Poor's REIT Composite Index is up 6 percent for the year to date. That compares with a 1.39 percent rise in the S&P 500 and a 1.99 percent decline in the Dow Jones industrial average over the same time.

As is often the case with any investment, especially one that's performed spectacularly, the professionals disagree about what's next for REITs.

The case against REITs is simple: The prices are too darn high.

"It's time to take profits," said David Darst, chief investment strategist of Morgan Stanley's Individual Investor Group.

The case for REITs is more nuanced.

"They're not as cheap as they were years ago — that's an understatement," said Don Cassidy, senior research analyst at Lipper Inc. But, he said, "they still have a place for investors."

The REIT run up, of course, coincided with a booming real estate market that has resulted in national watercooler chatter about whether real estate is a bubble.

"People say, 'Real estate. Bubble. REITS bad,'" said Cassidy. REITs, however "don't buy single-family homes of the rich and famous. They buy real stuff that generates income. They don't buy it if it doesn't make sense. If the price gets too high, they sell it and take a profit."

The answer might lie in the fact that real property throughout the years has grown in value — recovering even when other investments have soured for good — and tend to rebound after losses. Compare that with companies, even whole sectors, that are capable of sending billions of dollars in investor money into the void. And while a corporation can disappear, land doesn't.

"Real estate is different than dot-coms," said Greg Sukenik, equity research analyst for REITs at Zacks Investment Research Inc.

Still, Sukenik said, "I certainly don't see the run-up continuing," although he doesn't think a real estate crash is coming. Instead, he says a less dramatic correction is more likely.

One argument for holding REITs is that they're a way to diversify your portfolio, because REIT prices don't correlate highly with either stocks or bonds. Another plus is that REITs pay dividends, which now average about 4.5 percent annually. By law, REITs must distribute their extra earnings to investors.

Next, there's been strong interest in U.S. REITs from global investors. Foreign investors buy REITs because the weak dollar makes them look cheap and the dividends are attractive.

"Even though 4.5 percent is historically low, it's higher than you can get from Japanese bonds, or Australian limited property trusts," said Arthur Oduma, equity analyst covering REITS for Morningstar Inc.

Finally, there are the laws of supply and demand. Office rents have been rising as the economy and the job market improved, Sukenik said. Hotels are also doing better.

"Unlike a widget, you can't produce new supply tomorrow," said Marc Halle, managing director at Prudential Real Estate Investors. "New supply is three or four years away." For instance, only two new regional malls opened this year, he said.

Another attraction to REITs is they're not that hard to understand.

"People understand real estate because they either own it or live in it," said Don Cassidy, senior research analyst at Lipper. "You ride by those apartment building or those office buildings with a plaque from your REIT and say, 'I own those.' It's kind of like owning McDonald's."

(© 2005 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)