REITs have been traditionally attractive because of their dividend yields and their low correlation to other asset classes. With the recent run up in this sector, it has created an interesting scenario. The yields on a lot of the REITs have been squashed because the share price has been charging up. As of today, most money market funds are providing an essentially “risk free” yield of 4% – 5% depending on share class. That’s about a spread of 1%+ over the Cohen & Steers REIT index. If you been in the REIT game for a long time, you’d probably know what’s in store. Most major REITs are concentrated in commercial properties. Commercial properties have been red hot the last few years and have been appreciating at record levels just like the residential market. I think we all know where residential properties are going. Why would commercial properties be so different? Sure these big companies have a lot of cash but at some point the cost of borrowing will become too expensive and pull down the property prices. Basic supply and demand.
I’ve gotten out of REITs entirely. The risk is too high now. If you’re more strategic than tactical, I’m sure they will revert to their average return over the long haul. There just may be some big pot holes in the road in the near term.
