Investors hunting for high yields or capital appreciation sell off.

The real estate market has been a bit of an enigma the past few years. One one hand, REITs have been on a four-year run that helped many investors weather the bear market and solidified the asset class as a staple in many portfolios. On the other, some observers have worried that real estate investors have become too speculative and, dare we say, exuberant, with too much fast money pouring into the market without regard for underlying fundamentals.

Now it seems those opposing viewpoints have come to a head.

What everyone said would happen sooner or later in real estate stocks has finally happened: The market fizzled. In the wake of a robust jobs report at the end of March, fears of interest hikes got the better of many real estate investors and sparked a selloff.

After starting the year strongly, the NAREIT Composite Price Index declined 15.26% in April, while the NAREIT Equity Price Index sank 14.58% over the same period. As of May 3, the composite index was down 3.19% for the year.

REIT funds, meanwhile, saw an exit of cash. Outflows of nearly $500 million were reported after the first three weeks of April. If the trend continues, it could mark the first quarter since the fourth quarter of 2001 that real estate funds have experienced net outflows.

The natural course of questions has since followed. Is the run over? Has the bubble burst? Was there a bubble in the first place? What do investors do with their real estate holdings now?

Not everyone is in panic mode. For advisors who utilize real estate first and foremost as a diversification tool, the events of April were par for the course-a healthy correction that could even be used as a buying opportunity.

"I don't think it's necessarily inaccurate to say that a little steam has been let out," says Michael Grupe, NAREIT's senior vice president for research and investment affairs. "I also think that from time to time that's probably a good thing. This may very well be one of those times."

The reason, Grupe says, lies in the strong, yet atypical, performance of real estate in recent years. In the four-year period covering 2000 through 2003, he says, NAREIT's total return index was up slightly more than 100% and the price index was up 50%.

Those were numbers that were viewed as a salvation by investors during the bear market. But they were also off the charts. Grupe points out that for the 30 years prior to this run, the NAREIT total return index had an average annual compound return of 14%.

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