REITs Remain the Most Popular Alternative for UHNW Investors

REITs – or Real Estate Investment Trusts – remain the most popular alternative investment for affluent Americans seeking to diversify their portfolio away from more traditional products, such as stock and bonds.

REITs are generally corporations that own real estate assets, such as rental apartments  and office buildings, or mortgage bonds. Income is derived by renting or leasing the property, or loaning money to fund third-party real estate projects, according to the website 101 LIFEPLANNING. REITs enjoy a special tax status that requires the corporations to distribute at least 90 percent of its profits to shareholders as dividends.

Largely because of these payouts, REITs outperformed the broader stock market by a factor of almost four in 2011, according to the National Association of Real Estate Investment Trusts or NAREIT. Total returns of list U.S. equity REITS was up 8.28 percent last year, compared to a 2.11 percent gain for the S&P 500.

Last year’s more than 8 percent gain in 2011, followed a 27.95 percent gain in 2010 and a 27.99 percent gain in 2009, according to NAREIT, compared to 15.06 percent and 26.46 percent gains for the S&P 500, respectively. The association explains, “Much of REITs’ performance advantage has come from the stocks’ dividend payouts, since almost all of a REIT’s taxable income is paid to shareholders as dividends.”

Steven A. Wechsler, the association’s president and CEO said, “The strong, continuing income stream from REITs is an important component of the appeal of REIT shares for investors. REIT dividends boost in investment portfolio’s performance in good times and help insulate it from downside shocks in turbulent market conditions.”

That dividend boost is sought by 33 percent of Ultra High Net Worth investors, who reported owning REIT shares for an average balance of $492,000 at the end of 2011, according to a fourth quarter wealth study by Millionaire Corner of investors with assets of $5 million to $25 million not including primary residence.

These high net worth investors preferred REITS to other alternative investments, including hedge funds (8 percent), venture capital (7 percent), private equity (13 percent), private placements (9 percent) and futures (7 percent). Less affluent Millionaires and non-Millionaire investors are much less likely to own REITs, though, like the Ultra High Net Worth, the less affluent prefer REITs to other alternative investments.

U.S. publicly traded REITs currently manage $407 billion of assets and own $500 billion of commercial real estate assets, reports NAREIT. Investors considering the increasingly popular products should be aware of the disadvantages and risks posed by REITs. For one, their growth is somewhat hindered by mandated dividend payouts that prevent the corporations from reinvesting more than 10 percent of annual earnings back into the company, according to 101 LIFEPLANNING. REITs are also vulnerable to cyclical downturns in the real estate market that can both lower the value of shares and affect dividends. The dividend payouts from REITs can also create negative tax consequences.