TK – I am a commercial investment guy who used to work for in the REIT world (but now independent for a decade).
Macro: REITS are a great way to get exposure to real estate and possibly a solid, risk adjusted yield for a slice of your portfolio. REITS seem to have recovered and perhaps “overrecovered” in value. Right now REITS are not trading at any significant discount to the underlying real estate assets.
The big reits do NOT perform like a real estate investment but rather like an operating company. You get income, hopefully increasing, however you will not directly benefit with a big profit check when they sell a building.
Thus, if you are looking for more direct exposure to ‘invest in real estate’ there are other alternatives to explore (partnerships, single property REITS, etc).
MICRO: specifically, many REITs seek out high quality, stabilized assets to generate the cash they need to cover their dividends. Thus, sectors like core/CBD trophy office reits have been paying very high prices due to the ‘flight to quality’ of international captial. These bldgs have been bid up to less than 10% below their 2007/8 peak pricing…frothy to say the least. In fact, many of the more opportunistic/upside pension funds have recently backed out of the space since the bldgs have been bid up to a low 4%-5% cap rate (with full occupancy and no operational upside).
Also look for total debt (property and corporate combined) less than 60% of the total asset value. the lower the better (i.e. safer).
Thus, my suggestion this: Yes, REITS are a great way to gain exposure to real estate backed income. Put your logic hat on and either pick a property subset (property type/geography) then invest accordingly.
If you want a broad exposure, I suggest looking at the several Cohen & Steers real estate mutual funds. These guys are the best at this niche.
If income is your goal, take a look at REIT preferreds. They have high yields, but do have some potential pitfalls, however, worth educating yourself on since you will better understand the entire captial stack of the REITS you may ultimately invest in (senior debt, mortgage debt, preferred equity, common equity).
