REITs knocking on employer-sponsored plans' door

Few investors can choose to diversify with real estate

Investors are coming to realize that holding real estate in their portfolios is a good way to diversify holdings and hedge some cyclical risk in the broader stock market.

But for most individuals, who invest solely through an employer-sponsored plan such as a 401(k), buying the real estate sector is not even an option.

'Private families, large investors, pension funds and other institutions all own real estate. ItÂ's not so much the absolute return they are after, but the fact that real estate returns have a low correlation to other stocks and bonds,' said Jack McAllister, vice president of institutional investment affairs for the National Association of Real Estate Investment Trusts.

Especially in the last three years common stock was beaten down, real estate has held up well. The average dividend yield on a REIT is 6.5 percent, and total returns have averaged around 14 percent in the last two years.

Yet most people who would like to own a piece of AmericaÂ's offices, shopping malls or apartment complexes are shut out of the process. NAREIT calculates that only 6 percent of 401(k) plans in the nation provide a real-estate option, and less than one-half of one percent of all 401(k) assets are in real estate.

In contrast, real estate accounts for 10 to 15 percent of the mix in defined benefit plans, such as pensions.

'The fundamental returns to REITs are high income and low to moderate growth. We think that will resonate with people going forward,' McAllister said. 'As more of the baby boomers move into retirement, the demand for current income is going to rise.'

REIT opportunities
Real estate investment trusts are companies that own and manage real property and receive favorable tax treatment in return for paying out the bulk of their earnings to shareholders.

There are office-building, retail, industrial and apartment REITs. Some REITs are national, while others specialize in a particular region of the country.

There are 182 publicly traded REITs, up from 130 a decade ago. The individual REITs have been growing as well; Equity Office Properties (EOP: news, chart, profile), the largest U.S. REIT, has a market cap of around $12.5 billion, bigger than the entire REIT industry 10 years ago.

NAREIT has launched a public awareness campaign aimed at getting more companies to consider putting REIT choices into their retirement plans. It is, along with action on terrorism insurance, the groupÂ's top priority.

WeÂ're identifying the largest plan providers and sponsors, and those financial professionals who serve that community, and bring their attention to REITs,' McAllister said. 'WeÂ're asking Â'Hey, why donÂ't you have REIT options?Â''

At least a handful of major corporations have added REITs to their 401(k) choices, McAllister said, including Daimler-Chrysler (DCX: news, chart, profile), Eastman Kodak (EK: news, chart, profile) and Ford. (F: news, chart, profile) The state of Pennsylvania now allows a REIT choice in its college-funding 529 plan.

Verizon (VZ: news, chart, profile) on Jan.1 became the latest company to join the REIT parade. The company brought in the investment professionals who ran its defined benefit plan to assess the needs of its defined contribution plans. The conclusion: REITs are an asset class that belong, McAllister said.

'We are beginning to see a trend of some of the leading U.S. corporations to look at their 401(k)s and we are seeing some add REITs,' McAllister said. 'The trend doesnÂ't show any signs of abating: Over time, people will have a greater awareness of what real estate can do for their portfolio.'

Steve Kerch is the real estate editor of in Chicago.

(source: CBS Market Watch)

Related News