REIT Funds Are the Hot Properties Now

Mutual funds specializing in real estate are clawing their way back after taking a clobbering in the credit crunch last year.

The average real-estate fund, which lost more than 14% on average in 2007, is up nearly 5.6% this year through May 12, which makes it the second-best performing U.S. stock fund group this year, behind the hot natural-resources funds category, according to Chicago investment-research firm Morningstar Inc. That's an impressive showing when one considers that the Standard & Poor's 500-stock index total return has slipped 3.7% in the period, according to Morningstar.

"The Cinderella story for the year is REIT funds coming back," says Tom Roseen, senior analyst at fund tracker Lipper Inc. "Keep in mind that last year they were the pariahs of the group; they were the worst-performing classification that we had."

After years of spectacular returns, funds investing in real-estate investment trusts hit a wall last year as concerns about the residential housing sector and other issues snowballed into a full-blown debt-market crisis. The private-equity boom waned, commercial property owners found themselves facing tough lending terms, and some developers defaulted.

Skittish investors turned on their heels.

"A number of the managers we talked with saw outflows, especially toward the end of last year as investors were reallocating," says Andrew Gogerty, a senior mutual-fund analyst at Morningstar.

The JPMorgan U.S. Real Estate fund, for example, lost about 18% in 2007, yet its assets declined by 34%, according to Mr. Gogerty. "Investors pulled out their money, and either thought real estate was dead or tried to reallocate and catch the tailwind of international real estate," he says. "Frankly, it was a mistake. The fund's absolute loss had more to do with the market than with any allocation miscues by the management team." The fund's A shares are up nearly 11.7% this year through May 12, according to Morningstar.

Keith Pauley, chief investment officer at LaSalle Investment Management, says improvement in the credit markets over the past 2½ months -- combined with strong earnings results in certain names and an encouraging overall first-quarter earnings season -- has boosted the sector.

Lipper's Mr. Roseen noted that first-quarter earnings for about half of REIT stocks were above expectations.

Such improvements appear to be helping fund investors over their jitters. After pulling $6.4 billion out of real-estate funds, excluding exchange-traded funds, in the last three quarters of 2007, investors shoveled $1.9 billion into them in the first quarter of this year, according to Financial Research Corp.

Jon Cheigh, portfolio manager of the $2.5 billion Cohen & Steers Realty Shares fund, says that isn't surprising since real estate generally does well when there's a crisis of confidence. "In an environment where people are trying to figure out whether Bear Stearns's stock is worth $80 or $10 or $2, commercial real estate is tangible, it's a transparent business, it's well-understood; you know what you own," he says.