Wall Street has come up with a new way to invest in real estate without paying a commission. Several firms are packaging real estate investment trusts (REITs) into what are known as unit investment trusts (UITs), or fixed portfolios with a limited life. Unlike mutual funds, these baskets of stocks don't change at all from the time they are created until they dissolve, typically in two years.
Brokers sell the trusts without a load during the initial offering period, which lasts about three weeks. That makes these units a good deal if you get in early. They're also attractive if you have only a small amount to invest: Salomon Smith Barney's trusts have a minimum of only $300, and Prudential Securities asks for $250 for retirement accounts. Anyone who wants to buy into a trust after the offering period must do so in the secondary market and pay an upfront charge, usually 4%. The trusts currently have annual dividends of about 6% and are down a few percentage points this year but most compare favorably to the 4% slide in the Wilshire REIT Index in 1998.
NEW PLAYERS. The UIT sponsor can forgo a commission because it gets stock from the REIT at about a 5% discount. Salomon Smith Barney was the first firm to structure such a deal last fall, followed by Prudential Securities, Legg Mason Wood Walker, and Nike Securities, a Chicago-area firm that specializes in UITs. All completed second trust offerings this year. Merrill Lynch, EVEREN Securities, and J.C. Bradford have also gotten into the act recently. Van Kampen American Capital, which sells through independent financial advisers, currently has a new REIT trust with a $1,000 minimum in the no-load phase. Its REIT Income and Growth Trust, Series 1 will be priced on Apr. 9. "Everybody is jumping on the bandwagon," says Glenn Mueller, head of Legg Mason's real estate research team. Several firms, including Salomon Smith Barney and EVEREN, say they plan to offer new REIT trusts as often as once a quarter as long as demand holds up and REITs continue to need new financing.
Most of these trusts are made up of about 10 REITs, including those specializing in apartment, industrial, retail, and office buildings. To be in the trust, a REIT must work with the firm's investment banking division. That means the dealmakers have some role in the construction of the portfolio, although firms say the research department has the ultimate say in which REITs are chosen.
While you can buy shares of trusts already on the market, the real trick is to find out about upcoming offerings in time to get in during the no-load phase. So you need to know a broker at a firm who can alert you, or call the 800 numbers of potential sponsors to find out if a new real estate UIT is in the works.
Be aware that trusts are hard to research. You won't even know which REITs are included until the trust is priced. That could spell trouble if some of the REITs turn out to be a bust. Given the UIT structure, a trust can't dump problem holdings. Another drawback: When the UITs are liquidated, you may be forced to cash out even if you prefer to hold the trust as a long-term play. That may trigger a taxable gain.
BAILING OUT. To get some clue about the potential portfolio, ask your broker or financial adviser for a list of the firm's current and past REIT picks with their total returns. If you buy in and the real estate market turns south, you can always sell your UIT shares back to the firm which makes a market in the shares. Firms say there is no commission for redemptions and they buy back shares at their current market value.
An alternative to a REIT UIT is a real estate mutual fund. Nearly 50 such funds are available now, and more are cropping up. Two promising new ones are T. Rowe Price Real Estate and Cohen & Steers Special Equity, although both are down so far this year. In fact, the average real estate mutual fund has fallen 2% in 1998, according to Morningstar.
The advantage in owning REITs through a mutual fund is that you have a portfolio manager on hand to make adjustments if real estate market conditions change or better opportunities come along. UITs, on the other hand, appeal to investors who want to stick with a fixed portfolio and don't want to pay management fees or trade the portfolio. The way the REIT UITs have been selling, there are plenty of those people around.