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Investors may cool to REITs as economy improves


Real estate investment trusts, or REITs, aren’t expected to perform as strongly in 2011 as the economy improves, Reuters reported.

Last year, the average 3.81 percent dividend on REITs was about a point higher than the 10-year Treasury rate, making them a hot commodity among investors. Their total return, including dividendS and stock price appreciation, was 28.5 percent.

However, even though an improving economy will probably lead to higher rents and fewer vacancies in the commercial real estate sector, the economic rebound will probably also lead to higher interest rates, which will dampen earnings and push investors to pursue other opportunities.

“If you think of commercial real estate as a lagging cyclical sector, then there are probably other sectors people can get more excited about and have better growth prospects in an improving economy,” said John Wenker, senior managing director with FAF Advisors Inc.

Investors who do pour cash into REITs, which over the past two years have cut their dividends to bare minimums to safeguard cash and bolster balance sheets, are going to expect higher returns.

“They’re going to pay out a bigger percentage of their earnings, because they feel better about the future,” said Jon Cheigh, a portfolio manager at Cohen and Steers Inc.

Jay Leupp, executive vice president of Grubb & Ellis Co., which manages $4 billion in real estate assets, is optimistic that REITs will hold their own this year. “Real estate fundamentals and good old-fashioned earnings growth and dividend growth are going to drive share prices,” he said.

According to SNL Financial LC, Wall Street analysts expect REIT dividends to grow by an average of 4.5 percent in 2011.

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