Can the streak of positive returns continue?
When the equity market sank during the three years leading up to 2003, investors were able to find some measure of comfort by moving money into REITs and other real estate investments.
That wasn't so surprising since real estate has often been used, with varying degrees of success, as a hedge against fluctuations in the stock market.
What was surprising to many in the real estate sector, however, was what happened after equities bounced back last year: Investors stuck around.
Even with the robust rally in stocks-the S&P 500 rose 28% in 2003 and the Russell 2000 was up nearly 48%-investors didn't take their real estate investments and run, as some investment veterans quietly anticipated. Demand for real estate investments continued.
The result: The NAREIT Composite REIT Index rose 38.47%, which represents the index's highest growth rate in about a quarter century. Many in the real estate sector are taking these numbers as a message that real estate is no longer one of many alternatives that sit on the periphery of the investment portfolio universe. Investors, they say, seem to be finally embracing real estate as a core investment.
"I think investors, both institutions and individuals, are taking that whole concept to heart," says Michael Grupe, senior vice president for research and investment affairs for NAREIT, the National Association of Real Estate Investment Trusts. "It really underscores the importance of having a disciplined asset allocation approach. I think that's one of the reasons that real estate stocks performed as well as they did."
One of the trends giving rise to this attitude, those in the real estate sector say, is the growing amount of real estate properties moving from the private to public market. The securitization of real estate, they say, is mitigating the traditional fears about real estate being inherently risky.
"What I think people are starting to realize is that real estate is probably a less risky asset than it has been perceived to be," says John Kramer, president of Kensington Investment Group, a real estate investment advisory group in Orinda, Calif. "The risk premium assigned to real estate five years ago was too high. It's not as volatile a business as it was ten years ago."
Plus, with Treasuries providing yields in the area of 3%, real estate remained attractive to income investors, who could dip into REITs and enjoy average yields that were on average 200 basis points better than Treasuries. "I think the whole REIT industry has matured and gained greater acceptance," says Dan McNeela, a senior analyst with Morningstar.
Making the strong year in real estate even more surprising was the fact that it came after analysts were generally of the opinion that 2003 would represent a year of modest growth. It seemed like a rational view. At the conclusion of 2002, real estate had three straight years of positive returns under its belt. Stocks, meanwhile, were in a three-year rut.