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Advisers See Role For REITs In Retirement Accounts

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Should real estate investment trusts (REITs) have a place in retirement accounts?

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 S&P 500.)

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 two recessions.

"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 real estate.

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 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 indexes.

Some of Ledoux's favorite names include Kilroy Realty ( KRC ), which has office buildings primarily in Southern California, and S.L. Green Realty ( SLG ), 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 said.

"At this point in the cycle, occupancy is at historical high levels, which tends to lead to strong rent growth," Ledoux said.

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 ctoro@namadvisorguide.com25 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 inflation.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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