Other categories of REITs that produced 20 percent-plus three-year annualized returns included self-storage units, industrial plants, health care, retail and Asian real estate.
Although REITs are still largely a U.S. phenomenon, they’re also a growing asset class in Europe and Asia. REITs globally raised $22.6 billion in the first quarter of the year, on pace to surpass the record $73.3 billion they collected in 2012.
REITs Triumph
“You’ve had tremendous gains in the assets that REITs are investing in, which is driving enthusiasm and performance,” says Brian Hargrave, chief investment officer at ZAIS Financial Corp., a mortgage-focused REIT run by Red Bank, New Jersey-based asset manager ZAIS Group LLC. “It’s a theme among investors to get exposure to the recovering housing economy.”
For U.S. investors, the advantage of REITs is that they’re required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders as dividends, in exchange for paying little or no corporate income tax.
“That’s probably the single biggest benefit to the investor,” Hargrave says.
Yet real estate is a volatile and cyclical investment, with REIT prices rising and falling along with movements in the larger economy. That became clear in May, when U.S. Federal Reserve Chairman Ben Bernanke’s announcement that the Fed might slow its debt-buying program sent bond prices plunging. Shares of mortgage REITs fell 11.2 percent for the month ended July 10.
Leverage Rises
Meanwhile, the real estate moguls whose heavy borrowing helped fuel the 2008 financial crisis are back at it, taking advantage of Federal Reserve-driven low interest rates to amplify their returns through leverage. In an April report, the U.S. Treasury’s Financial Stability Oversight Council cited the borrowing of mortgage REITs as a source of instability in the economy.
“You’re starting to see more and more REITs that are borrowing to pay their dividends,” Tangent Capital’s Rice says. “That’s a bit of a yellow flag in terms of whether you want to be chasing the asset class right now.”