Should real estate investment trusts (REITs) have a place in
After the 2000-02 bear market, most people would've said yes.
The real estate investment trust group rose about 30% in the
2000-02 bear market, while the Nasdaq careened 78% lower.
How's that for outperformance? Then along came the bear market
of 2007-09. REITs not only got hit harder than the general
market, they also stayed down longer. (The Finance-Property REIT
industry group fell 76% in 25 months vs. 58% in 16 months for the
What changed? And what does the change tell investors about
using REITs in retirement accounts?
A Tale Of Two Bears
Christian Ledoux, director of equity research at South Texas
Money Management in San Antonio, says the difference in REIT
performance in the two bear markets was tied to the nature of the
"I think the reason they did well in the '02 recession is that
the recession was not a financial recession," Ledoux told IBD.
The 2007-09 recession, however, revolved around financials and
REITs rely on financing, Ledoux said. And so they were
slaughtered in 2007-09.
"In a traditional recession, the value of real estate doesn't
change much," Ledoux said. That makes real estate a good
inflation hedge, he says.
REITs are a nice way for individuals to get exposure to real
estate, Ledoux says. It's not as if the average individual
investor can buy an office building, but he or she can buy into a
REIT that owns office buildings, he says.
REITs invest directly in real estate or mortgages, and trade
on stock exchanges. They're obliged to pay out 90% of their
taxable income in the form of dividends. REIT income derives
primarily from rent and mortgage interest.
South Texas Money Management, which manages
firstname.lastname@example.org billion in assets, has used REIT
funds or ETFs in the past, but "the preference is for individual
names," Ledoux said. A money manager doing his own research, as
Ledoux does, can outperform REIT ETFs, most of which track REIT
Some of Ledoux's favorite names include
), which has office buildings primarily in Southern California,
), which focuses on New York City office buildings.
Several factors make South Texas Money Management bullish on
office buildings in central market districts. Ledoux said foreign
investors in Asia are buying "trophy buildings" in U.S. cities.
There's also a trend of companies coming back to the cities, he
"At this point in the cycle, occupancy is at historical high
levels, which tends to lead to strong rent growth," Ledoux
Curtis Whipple, founder of C. Curtis Financial Group, says
REITs "can still be a viable part" of a retirement account.
The Plymouth, Mich.-based company, which has about
email@example.com million under management, considers
health-related REITs the best niche in the group.
ObamaCare is helping the health REITs, Whipple says.
Whipple also sees REITs as an inflation hedge. And the author
of "Retiree Lifeline! How to Get the Government Out of Your
Pocket" says government policies have set the stage for
CAN SLIM Adviser
Chris Toro, founder of Blueprint Wealth Advisors in New York,
is a certified CAN SLIM adviser.
Most of his clients want to do 100% CAN SLIM and take their
income out of stock profits. But some clients aren't comfortable
with that approach. For them, Toro fashions a 50% fixed income
and 50% CAN SLIM approach.
The income portion is where Toro sometimes uses REITs. "I
think they are attractive, especially right now when you can't
get much yield elsewhere."
But he doesn't pick individual REITs. "I prefer to do it with
some sort of a basket like an ETF," he said.