Assessing REITs in This Environment

A common belief that has popped up in the last few years is that everyone should allocate a lot of money to REITs. There are some who advise 10-20% to REITs as being appropriate.

The 10-20% idea has never made sense to me. I have been writing about maintaining a moderate allocation for a long time.

The context here would be pretty much every type of REIT except mortgage REITs which I have never liked and timber REITs which, rightly or wrongly, I view as different. I am talking about malls, storage, office parks, warehouses, apartments and the like.

This chart reveals that domestic REITs have had a miserable few months, foreign REITs have struggled a little while the S&P 500 nets out flat. Folks who listened to the 10-20% crowd are either lagging badly or have had to be very right elsewhere in their portfolios.

I think this is analogous to putting 20% into commodities - notwithstanding that all the studies say this is a good idea.

I am a huge fan of REITs and have been for a while, but believe in a moderate allocation. Clearly, interest rates going up is not a good thing, but I would not have thought they would have dropped by this much. Only having one REIT at about a 3% weight (maybe a touch less now) means I didn't have to be right about the magnitude of the decline. The one REIT I use across the board is down 20 something percent and while that is a bummer (recurring theme here) there has been no real damage done overall.

One reason I don't load up is that REITs have almost no presence in the S&P 500 (I scanned the list down to SLM Corp. and didn't see any), so the way I view things adding a few percent can add some value but adding too much amounts to a big bet.

The other thing is that with rates coming off all time lows and still being historically low, it hasn't been a great place to be heavy. For anyone with no exposure it might be a good time to add a little. Prices are down 25% and while I have no idea if they will go lower, they are a lot cheaper than when Sam Zell sold Equity Office.

Comments

[CrossProfit_:]

We abandoned the REIT market about two years ago and cover only 5 lonely REITs today. One is fairly new (real estate!) and is more in line with the gist of your article and that is the oversold factor. The majority of REITs today do not appear to have an oversold factor, however as we do not cover in depth, this is an observation and not an analysis.

In the past you have written about Plum Creek Timber REIT (PCL). Here is a link to the CrossProfit chart (click view) www.crossprofit.com/se...;searchby=bysymbol . As of the Friday close, the stock is 0.13% above the evaluation line posted eleven months ago. It will be interesting to see where the stock closes at the end of August.

CrossProfit

2007 Aug 06 08:27 AM

[CrossProfit_:]

Correction
PCL is 0.13% below the evaluation line.

2007 Aug 06 08:48 AM