Real-estate investments can move in mysterious ways.

Even as prices of residential homes have languished, the stocks of companies that own and manage self-storage buildings, apartment complexes, shopping centers and office buildings have enjoyed a resurgence.

Big-buck and small-buck investors alike are looking for opportunities as they put a dismal 2007 performance behind them.

The recent $2.9 billion sale of the General Motors Building that overlooks New York's Central Park was the largest amount ever paid for a single office property.

That 2-million-square-foot building bought by a group led by Boston Properties Inc. was part of a package deal that included three other office towers. The seller had gotten caught in the credit crunch.

Meanwhile, smaller investors are noticing improved returns of real-estate mutual funds.

The average real-estate fund is up 7 percent this year, compared with the 3 percent decline of the average U.S. diversified stock fund, according to Lipper Inc.

Real-estate funds are down 14 percent for the 12-month period that includes last year's general market worries over credit issues, as well as concern that real-estate stocks and properties had become overvalued.

But the three-year annualized return is 9 percent and five-year annualized return 16 percent. Some experts believe REITs should have a home in most portfolios.

"There has been quite an inflow of money into real-estate funds this year because people believe the market has already priced in many of the negatives about the economy and real estate," said Barry Vinocur, editor of Realty Stock Review in Novato, Calif. "And it generally is a bullish indicator whenever you see investors putting money in."

Real-estate investment trusts, or REITs, are the primary holdings in real-estate funds, though they often also hold the stock of companies that provide products and services to the real-estate industry.

A REIT invests in and owns properties. It is traded on an exchange like a stock and typically provides dividends comparable to bonds. REITs owning self-storage properties are this year's hottest category, because of rising home foreclosures and increased need for storage space by companies.

"Investors have first been attracted by the relatively defensive aspects of REITs, which include the quality of their earnings and relatively high dividend yields," many around 5 percent, said David Harris, REIT analyst for Lehman Brothers in New York. "A second factor is that some of the aggressive shorting activity (betting on a stock to decline) from hedge funds is less noticeable this year."

In this uncertain economy, the focus is increasingly on the best-financed REITs.

Two REITs recommended by both Vinocur and Harris are:

• Boston Properties Inc. (BXP), whose chairman is Mort Zuckerman, is a disciplined REIT that owns and manages more than 130 blue-chip office buildings in New York; Boston; Washington, D.C.; San Francisco; and Princeton, N.J., business centers. Mature buildings are sold regularly, the profits used to pay dividends and reinvest in development. The GM Building deal was a coup.

• Simon Property Group Inc. (SPG), the largest publicly traded REIT by market capitalization, owns or has an interest in 168 regional shopping malls, 67 community shopping centers, 37 "The Mills" malls, 38 premium outlet centers and 10 other shopping centers or outlet centers in 41 states and Puerto Rico. Through joint ventures, it also has interests in 51 additional European shopping centers, six premium outlet centers in Japan, one premium outlet center each in Mexico and South Korea and an interest in five shopping centers under development in China. The firm's geographic and tenant diversification reduces its overall risks.

"A lot of what happened with REITs in 2007 was because financing dried up, but larger, more established REITs had strong enough balance sheets to handle it," said Bridget Adams, REIT analyst with Argus Research in New York. "The one thing I'm worried about right now is office REITs, because if employment numbers worsen, we could see a decline in lease renewals."

Harris doesn't expect big rewards ahead for taking too much REIT risk. He prefers those with the greatest defensive characteristics, such as good balance sheets and dividends, quality assets and management, and "not too much" development under way.

His favorite REITs include Chicago-based Equity Residential (EQR), the largest publicly traded apartment REIT by market capitalization, and Douglas Emmett Inc. (DEI), with office buildings and apartments in Los Angeles and Honolulu.

"If you have enough money to say you have a portfolio, then you should have an allocation to REITs in the 10 to 15 percent range," Vinocur said. "With an eye to three- to five-year results, we like what we call the dominant companies and the 'destined-to-be-dominant' companies."

Vinocur suggests Macerich Co. (MAC) in shopping malls and AvalonBay Communities Inc. (AVB) in apartments. He also recommends Vornado Realty Trust (VNO) primarily in office buildings and ProLogis (PLD) in industrial space.

His choice in self-storage is Public Storage (PSA). For non-mall shopping centers, Vinocur favors Kimco Realty Corp. (KIM). Adams notes that Kimco is particularly strong in international development, increasingly emphasizing Mexico.

For investors who prefer low-cost index funds, Vinocur's favorite is Vanguard REIT Index Fund (VGSIX), with a three-year annualized return of 10 percent and $3,000 minimum initial investment. He also likes the Vanguard REIT Index exchange-traded fund (VNQ), up 8 percent this year. Both track the Morgan Stanley U.S. REIT Index.

"Because REIT values are still low and feature a good 5 percent average yield, there are buying opportunities," said Greg Sukenik, senior analyst with Zacks Investment Research Inc. in Chicago. "However, they will still require patience because there could be some swings along the way."


Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, Ariz. 85287-4702, or by e-mail at [email protected].