Feb. 12 (Bloomberg) -- Deutsche Bank Private Wealth Management and MFS Investment Management are dumping shares of U.S. real-estate investment trusts just as Blackstone Group LP pays the most ever for a property owner.

Shares of U.S. REITs are the most expensive in more than two decades compared with Treasury notes after the five-year property boom. Real estate stocks helped lead the Standard & Poor's 500 Index higher in 2007 on speculation takeovers will increase after Blackstone agreed to buy Sam Zell's Equity Office Properties Trust for $39 billion in the biggest-ever leveraged buyout.

``Sam Zell is probably the shrewdest operator in this field that there is,'' said David Dreman, who oversees $21 billion at Dreman Value Management LLC in Jersey City, New Jersey. ``If he's selling, I don't think I want to be a buyer.''

Dreman said his firm is ``underweight'' REITs relative to gauges such as the Russell 1000 Value Index.

Institutional investors with $11.9 trillion in assets have been net sellers of REITs since November, according to the brokerage arm of Boston-based State Street Corp. Shareholders sold as dividend yields on the trusts tumbled below those of government debt.

The average yield of U.S. REITs tracked by the National Association of Real Estate Investment Trusts, or NAREIT, fell to 3.78 percent at the end of January. That was 1.03 percentage point less than the 10-year Treasury note, the biggest discount since 1985, according to data compiled by Bloomberg.

Ten-year notes yielded 4.80 percent today.

Shares Fall

Shares of REITs fell for a third day today, with an index of S&P 500 real estate companies dropping 2.2 percent, the most since November. Simon Property Group Inc., the largest U.S. shopping- mall owner by market value, paced the decline, losing $2.47 to $114.91. Kimco Realty Corp. slipped $1.16 to $50.72.

Real estate investment trusts are companies that develop and own everything from warehouses in California to skyscrapers in New York. President Dwight D. Eisenhower signed tax legislation allowing for their creation in 1960. Currently, 19 countries have REIT legislation in place.

Property trusts in the U.S. can avoid paying corporate taxes when they distribute at least 90 percent of their net income as dividends. Because of their bond-like incomes, some investors consider REITs and bonds to be competing investments. Property trusts, whose yields move inversely to their prices, also offer the potential for capital gains, like stocks.

Returns in the almost $500 billion U.S. REIT market quadrupled since 2000 amid the global property boom.

`Rich-Looking'

Real estate stocks through last week led the two dozen industry groups in the S&P 500 this year with a 12 percent gain, paced by Chicago-based Equity Office, the biggest U.S. landlord, and Indianapolis-based Simon Property. The group gained 1.4 percent last week, while the S&P 500 fell 0.7 percent.

``The market has got ahead of itself for REITs,'' said James Swanson, the Boston-based chief investment strategist at MFS, which has $180 billion in assets. ``It's rich-looking to me. I don't see how it can beat the stock market'' this year. Swanson cut his REIT holdings from September and is now ``underweight'' compared with his fund's guidelines for holding REITs.

Dividend yields on REITs have plummeted as share prices boomed. The NAREIT index of 179 U.S. property trusts has posted a total return of 348 percent this decade, for an average annual return of 23 percent in the past seven years. The S&P 500 has averaged a 1.1 percent return, including dividends, in that time.

`Shocked'

U.S. REITs tracked by the Leuthold Group last month traded at an average of 18.8 times adjusted funds from operations. That's the highest since at least 1997 and almost 50 percent more than the average for the past decade, according to the Minneapolis- based research and investment firm, which counts two-thirds of the 100 largest U.S. money managers as clients.

Benjamin Pace, who oversees $17 billion as chief investment officer at Deutsche Bank Private Wealth Management in New York, said he's been ``shocked'' by the run-up in REIT shares.

``You can't help but feel that the sector is overvalued here,'' he said, adding the firm sold some of its REIT holdings in December after having an ``aggressive weighting'' in 2006.

The last time REIT dividend yields fell as far below Treasury yields was during the seven years that started in November 1978. Bond yields soared as Federal Reserve Chairman Paul Volcker increased the central bank's target interest rate to 20 percent in 1980 to combat soaring inflation.

The NAREIT index underperformed the S&P 500 during that span by 33 percentage points.

REITs in Asia and Europe also have reached records as asset prices in Japan rebounded and countries from the U.K. to Germany and Pakistan follow the U.S. in introducing property trusts.

The Bloomberg Asia REIT Index climbed 34 percent in the past 12 months and five of the 10 biggest gains were from Japan.

Tokyo Prices

Commercial land prices in Tokyo increased last year for the first time in 15 years, according to figures from Japan's government, attracting investors to Japan's five-year-old REIT market. Tokyo-based Nippon Building Fund Inc., the region's biggest REIT, climbed to a record last week.

In the U.K., the FTSE All-Share Real Estate Index jumped 45 percent in 2006, outperforming a 13 percent gain in the broader market, before property trusts were approved on Jan. 1.

The gains pushed dividend yields in Asia and Europe even lower than in the U.S. Asian REITs yielded 3.26 percent last week, while those in Western Europe were 3.4 percent, according to data compiled by Bloomberg.

`Hard Pressed'

``One is hard pressed today to say that the REITs are a good value,'' said Preston Athey, who runs the $6.27 billion T. Rowe Price Small-Cap Value Fund in Baltimore. ``I'm becoming increasingly underweight.'' He said the fund's REIT holdings were about half his benchmark, the Russell 2000 Value Index.

Some investors who say REITs are overvalued expect that acquisitions will still inflate prices. The value of real estate trust takeovers announced last year more than doubled from 2005 to about $137 billion, according to data compiled by Bloomberg.

``You can run against the trend and get run over by the herd,'' said Thomas Nyheim, who helps manages $1.7 billion at Christiana Bank & Trust Co. in Greenville, Delaware.

So far this year, $27.6 billion in deals have been announced, the figures showed.

New York-based Blackstone upped the ante twice, raising its offer by 8.3 percent, to beat Vornado Realty Trust, the second- largest property trust by market value and also located in New York. Blackstone, which first bid $36 billion in November, will pay 33.8 times Equity Office's funds from operations, or adjusted net income investors use to determine earnings, in the takeover.

Only two of the NAREIT index's members trade at a higher multiple, based on an analysis of data compiled by Bloomberg.

London Rents

Buyers are scooping up property in New York, Washington and Los Angeles, where rents are rising the fastest and vacancies are plummeting.

SL Green Realty Corp., the biggest office landlord in Manhattan, last month completed a $4.5 billion acquisition of Uniondale, New York-based Reckson Associates Realty Corp., the trust whose 101 properties included five midtown Manhattan skyscrapers.

Dividend yields on REITs may rebound as five-year leases on office property signed at discounts in the wake of the Sept. 11 terrorist attacks get renewed at higher prices.

Midtown Manhattan rents climbed 19 percent to $62.07 a square foot from a year earlier, according to CB Richard Ellis Inc., the world's largest real estate consultant, in its semi-annual report in November.

Most Expensive

In London's West End, the world's most expensive location, rents increased 24 percent to $212.03 a square foot. Office space in central Tokyo rose 12 percent to $145.68 a square foot, while Hong Kong jumped 35 percent to $116.25.

Jeffrey Tyler at American Century Investments said the REIT boom provides more reason to sell, especially because private- equity firms are competing to buy.

``It's not a cheap way to get involved in the real estate market,'' said Tyler, head of asset-allocation funds at American Century, the Kansas City, Missouri-based money manager with $104 billion in assets. Tyler sold about 40 percent of his REIT holdings in May.

``All the private-equity money to me is somewhat of a last gasp'' for the REIT rally, he said. ``If they want them that badly and if you're involved in that market, you're supposed to say, `By all means, have mine.'''

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Daniel Hauck in New York at dhauck1@bloomberg.net

Last Updated: February 12, 2007 17:18 EST