Now the Time to Invest in REITs?

The Boomer is a column written for adults nearing retirement age and those already in their golden years. It will also promote reader interaction by posting e-mail responses and answering reader questions. E-mail your questions or topic ideas to

Not only did the 2008 financial crisis swipe a good portion of boomers retirement accounts, it also pounded both the commercial and residential real estate markets.

While the residential real estate market continues to struggle with falling home prices and foreclosures, the commercial real estate market has made some strides, but the progress is likely to remain slow because employers remain reluctant to hire and expand amid a shaky recovery.

Many investors, particularly those nearing or in retirement, have changed how they view real estate as an investment. While some financial planners are still wary over the residential housing market, others are more optimistic regarding commercial properties.

Real Estate Investment Trusts, more commonly known as REITs, allow consumers to invest in a professionally-managed portfolio made up of income-producing properties (either through properties or mortgages). REITs sell like a stock on major exchanges and are appealing to investors because they tend to offer high dividends.

Brad Case, head of research at the National Association of Real Estate Investment Trust claims REITs make retirement portfolios last longer and have outperformed stocks and bonds in almost every comparison year for more than 30 years. He goes on to say that putting 15% to 20% of a diversified investment portfolio in REITs can enhance long-term returns and reduce risk.

I recently talked with Case to get a better understanding of why he says now is the time to invest in REITS. Heres what he had to say:

Boomer:  How can real estate investment trusts make retirement portfolios last longer

Case: REITs can help boomers grow, diversify and protect their portfolios while generating income at the same time. All of this is increasingly important as people live longer and require more out of their investments to maintain their lifestyles.

To start, REITs pay a high dividend. They currently yield about twice the S&P 500 Index. This dividend income and growth is underpinned by the rental income REITs collect from their broad portfolio of commercial properties with multiple tenants.

REITs also offer the potential for price appreciation of the stock. Taking the dividend and stock appreciation together, publicly-traded REITs have provided strong long-term returns and outperformed stocks and bonds for most comparison periods over the past 30 years. Whats more is that over the last 10 years--which many consider a lost decade--REITs delivered an 11.5% compound annual total return versus 3% for the S&P 500 Index. Some 60% of total return for REITs historically comes from dividends, the rest from share price appreciation.

REITs are also an effective inflation hedge as a result of two factors. First, they can offset increasing prices with rent increases. In times of high inflation, many investors move money into real assets (like real estate) and this increases demand for REIT shares which in turn increases REIT share prices.

Finally, REITs offer significant portfolio diversification benefits. Historically, real estate investment returns have shown a low correlation with equity and bond returns because what affects REITs and the commercial property rents they collect will not necessarily impact the broader market and vice versa. According to Morningstar, investing about 15% to 20% of a diversified investment portfolio in publicly traded REITs can enhance long-term returns and reduce risk.Boomer: Please explain the law that says a REIT must pay out 90% of their profits as dividends?Case: Congress created REITs in 1960 as a way for investors to participate in rental income and growth from a wide range of commercial real estate properties without having to buy actual properties.

As part of this, REITs are required by law to distribute at least 90% of their taxable income to their shareholders. Many REITs distribute even more than this amount and pay the highest dividend of any types of companies. And if rents go up and profits rise, REITs have to pass along the income to shareholders.Boomer: The recent housing bubble put a big fear in real estate investments. Are investors still nervous investing in real estate? Case: Its important to keep in mind that it was the residential side of the real estate market, not the commercial side that was the main cause and casualty of the financial crisis.

REITs are part of the commercial real estate market, which is influenced by different factors from those that impact residential housing. Office REITs are impacted by employment growth, shopping mall REITs by retail spending and industrial warehouse REITs by import/export volumes. REITs generate continuing income flow from rents from multiple tenants and properties around the country.

Boomer: Given the recent housing burst in residential properties that sent our economy into a tailspin, how did REITs perform over the last three years?Case: While REITs were negatively impacted by the economic downturn, theyre up 200% since the market recovery began in March 2009. This year through June 30, REITs are up 9.93% versus 6.02% for the S&P 500 Index.

Boomer: What type of investments are REITs today?

Case: There are plenty of investment opportunities in REITs today. To start, REITs are still only at about 20% of their 2007 highs and a number of different types of REITs are currently benefiting from secular trends. For example, apartment REITs are benefiting from the stagnant residential housing market as more people are looking to rent; health care REITs, which include a combination of senior living communities, assisted living facilities and medical office buildings, are expected to see growing demand partly from an ageing population that is living longer; and data center REITs, which house huge server farms for the growing market of internet retailers and other companies, are benefiting from the migration to the cloud.

Boomer:  What advice do you have for boomers interested in investing in REITs?

Case: Boomers would most benefit by holding a wide range of REITS within their portfolios, which can be achieved by buying a REIT index or a fund; exposure to all types of REITS is best since the best performers in the REIT universe are always rotating.

For instance, apartment REITS have done well as more people are renting instead of buying, whereas a better economy and recovery in business activity would help the office and retail segments of the REIT market.

E-mail your questions to