"No serious academicians use the NASDAQ. There's a correlation between REIT share performance and volatility in the S&P 500," says Fosheim. "REIT shares are trading near all-time highs."

The year 2000 was a great year for REITs on the stock market, growing at a 28.6% rate after a few years of under performing. In 1997-98, REIT shares traded at a premium compared to the underlying real estate values, but now there is more parity between the two. And REITS are trading high relative to bond yields now too, Fosheim says.

Back in 1997, there were certain perceived wisdoms regarding REITs: for one, they will grow at a rapid clip until they dominate every property sector. Second, that pension funds will abandon direct investment in real estate and fill their allocation by owning REITs. Last, that REITs are voracious consumers of capital.

The reality of today, however, is quite different. REITs are growing in size, but at a moderate pace. In many property sectors they are far from dominant. Pension funds have allocated more money to REITs, but not at the expense of investing directly in real estate. Also, REITs have learned to recycle capital due to the slowdown in capital raising activities in the past few years.

Based on last year's stellar performance, Fosheim believes REITs' business models will continue to evolve, with asset sales, share repurchases and value-added activities being the focus. If there is any uncertainty regarding the REIT industry it is what the effect will be of the REIT Modernization Act of 1999 passed by Congress on December 17, 1999, and becoming effective in 2001. Under the Act, REITs are now allowed to own Taxable REIT Subsidiaries (TRS). In essence, those TRSs can be in all sorts of new businesses, not necessarily those that are real estate related. However, Fosheim believes the impact will not be very widespread.

"At first they'll be licking their lips now that they can legally do other stuff. Then they will be more thoughtful," Fosheim says. "A more natural extension of their business.

For example, Fosheim would not be surprised to see a REIT specializing in the multifamily market to branch out into the furniture rental business. It would be a mistake, he believes, if the same REIT would go into owning something else like hair salons or restaurants.

Just like REIT investors prefer that the REIT invest in one property type rather than spread itself too thin in the name of diversity, the more specialized the REIT remains the better. "Investors can diversify on their own," he says.In all, the greatest property type for investment by REITs today is large shopping malls, Fosheim says, and then office and industrial. Retail REITs had a tough year last year, while hotels are probably the most volatile of investments for REITs since they are tied to and track the economy more than any other property type.

Instant Insights /

REIT Industry Outlook Positive Despite Wall Street Troubles

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