"Of Mutual Interest,"-Real Estate Mutual Funds
Tuesday, June 10, 2008SUSIE GHARIB: The real estate market is in the doldrums. So you would probably think real estate mutual funds would be doing poorly this year. But as Erika Miller explains in tonight's "Of Mutual Interest," they're doing better than the overall stock market.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Given the weak housing market, most investors seeking big returns probably wouldn't think of real estate. But mutual funds that invest in real estate are actually the third best performing U.S. stock fund category this year, after natural resources and bear market funds. The average real estate fund has fallen 0.6 of a percent year to date, far less than the S&P 500's decline of 8 percent. Most real estate mutual funds invest primarily in REITs -- real estate investment trusts -- which own office buildings, rental apartments, malls and other commercial properties. Scott Westphal, portfolio manager of the Oppenheimer real estate fund, says this segment of the real estate market has held up relatively well, despite a slowing economy.
SCOTT WESTPHAL, PORTFOLIO MGR., OPPENHEIMER REAL ESTATE FUND: These companies' primary sources of cash flow are long-term leases for creditworthy tenants. So, even if the economy slows down a little bit, their sources of cash flow remain in place.
MILLER: He also says supplies of available commercial real estate space are fairly tight. That's because the cost of construction has risen dramatically over the past few years, due to higher commodities prices. Residential apartment buildings and self storage REITs have been especially strong performers this year. Morningstar's John Coumarianos explains that more Americans are renting homes instead of buying them.
JOHN COUMARIANOS, REIT ANALYST, MORNINGSTAR: We are coming off of a peak of about 70 percent home ownership in the United States, which is an all-time high and we seem to be declining back to the historic norm, which is about mid-60 to high-60 percent range. So, every percentage point loss in ownership represents about a million new renters.
MILLER: Many investors are also attracted to mutual funds that invest in REITs due to concerns about inflation. REITs are backed by hard assets, which can be a psychological comfort. In addition, many landlords have pricing power.
COUMARIANOS: As long as the economy stays reasonably stable, the theory is that landlords can keep boosting rents as their expenses go up.
MILLER: Some real estate experts do not believe REITs will continue to outperform the broader market, especially if economic growth rebounds. But others predict certain pockets will continue to do well, like prime downtown office space and community shopping centers.
WESTPHAL: Their tenants are primarily grocery stores and drug stores. And, no matter how the economy is doing at a given point in time, people still need to provide the basic necessities of life.
MILLER: Most experts agree the biggest risk to buying mutual funds that invest primarily in REITs is a sharp economic slowdown. If that happens, analysts warn those funds will likely take a hit, although not typically as much as other U.S. stock funds. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
