A Reit Play That's Less Likely To Go Wrong

For the past few years, the hottest investment in the real estate market has been the real estate investment trust (REIT). But sifting among the piles of REIT offerings flooding onto the scene is becoming a daunting and sometimes dangerous task. Now, though, investors have a rapidly expanding group of real estate mutual funds that want to do the job for them. By culling through REITs to identify the good, the bad, and the ugly, the funds may well become property investors' new darlings.

It's easy to see the appeal of the funds. While the Standard & Poor's 500-stock index had a total return (appreciation plus reinvested dividends and capital gains) of -0.55% as of June 9, the average real estate mutual tracked by Lipper Analytical Services Inc. was up more than 2%. During that period, two veteran funds, the $354 million Cohen & Steers Realty Fund and the $130 million PRA Real Estate Securities Fund, were among the top 30 of the 1,500 or so equity funds, up 9.81% and 9.03%, respectively.

Real estate funds have a big edge over another property investment, the limited partnership, or LP, now being offered by some Wall Street houses. LPs are structured to last for five years or longer, so selling early can mean taking a big loss. Fundholders, though, can redeem shares easily at net asset value. And even REITs, since they are traded on the exchanges, are liquid investments.

MAINSTREAM PLAY. Fund managers warn that even if real estate keeps improving, individuals could stumble badly by picking the wrong REIT. "In an industry that's tripling every year and a half, it's a loser's game for individuals to pick their own stocks," says PRA Real Estate Fund's Dean Sotter.

The supply of REITs has mushroomed, with their market capitalization rising from $16 billion in 1992 to $40 billion today. And analyzing the complex

prospectuses of many REITs hasn't gotten any easier. Not only do investors have to choose a REIT that focuses on the property type with the best prospects--apartments, hotels, malls, and so on--but investors must assess the economics of areas where properties are located. And analysts complain there's often not enough disclosure in REIT prospectuses to make fully informed decisions.

Fund managers say real estate is becoming a mainstream investment. "Five years ago, if you mentioned international investing, people would say that only the big guys do that, and now everyone is in international," says Jay Willoughby, manager of the new Crabbe Huson Real Estate Investment Fund. "We see the same situation in REITs." Willoughby's prediction may be a mite premature, but still, in just six months, the number of funds has doubled, from 6 to 12. And more are in the works.

The funds are attracting both big-name stock-pickers and new investors. CGM Realty Fund, launched on May 18, is managed by Ken Heebner, known for his successful $1.2 billion CGM Mutual Fund and $497 million Capital Development Fund.

Heebner says real estate is "a major opportunity" today. While many growth stocks offer 1%-to-2% yields, "I can buy REITs at a 7% yield or higher at the initial public offering," he says. "And I believe the dividend will grow at 10% to 20% a year." He seeks "undiscovered opportunities" and owns many apartment REITs. Heebner has also picked up a few hotel REITs, including Raleigh (N.C.)-based Winston Hotels Inc. A new area he's exploring: office REITs. He likes Highwood Properties Inc., which focuses on office buildings in Raleigh-Durham, N.C.

TRAILER CASH. Another new entrant is Franklin Real Estate Securities Fund, which has racked up an 11.6% return since its January inception. Fund manager Matt Avery likes apartment REITs in the Southeast and Southwest.

Two other new contenders, Columbia Real Estate Fund and Retirement Planning Funds of America Inc.'s Real Estate Securities Fund, have different strategies. Columbia's fund manager likes mobile-home community REITs for their stable cash flows. He also likes California REITs, hoping to benefit from an economic upturn. While Columbia's manager focuses on REITs, Retirement Planning Funds of America's Andrew A. Davis widens his scope to include companies with real estate exposure such as banks, insurers, and even oil and gas companies. He may buy an office REIT IPO, Liberty Property Trust, based in Malvern, Pa.

No one can predict which real estate mutual funds will lead the pack. But choosing among a dozen funds is far easier than sifting among the 210 (and counting) REITs on the market--and a lot less risky.

                     A FLURRY OF NEW
                      REAL ESTATE MUTUAL FUNDS
      MAY     CGM Realty Fund launched by well-known
      1994    stock investor Ken Heebner to concentrate on
      "undiscovered" real estate securities. Heebner favors apart-
      ment, hotel, and office  REITs.
      APRIL   Columbia Real Estate Equity Fund is 100%
      1994    invested in REITs, preferring industrial and manu-
      factured home community offerings.
      APRIL   Crabbe Huson Real Estate Investment Fund
      1994    focuses on total return in its pursuit of "cheap,
      out-of-favor" REITs. Favorites: industrial and mall REITs.
      JAN.    Retirement Planning Funds of America's Real
      1994    Estate Securities Fund owns mostly REITs but will
      also invest in banks, insurers, hotels, and oil and gas com-
      panies with real estate exposure.
      JAN.    Franklin Real Estate Securities Fund looks
      1994    for REITs that can grow dividend yields 5% to 10%
      annually for the next few years.
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