Analysts disagree about next step for real estate investment trusts

NEW YORK » After a long hot run, real estate investment trusts have cooled off in the last few weeks.

Which raises the question: Should investors cash out and take their winnings? Or should they stay in the game?

Real estate investment trusts, or REITs, trade like stocks, but act like real estate moguls, buying up properties. Sometimes a REIT focuses on a region, such as the Northeast, sometimes on an asset class, such as apartments, hotels or office buildings and sometimes they do a combination.

In the last three years, prices for U.S. REITs have appreciated nearly 55 percent, or 15.7 percent a year, according to Prudential Financial. Average annual dividends paid by the REITs were about 7 percent.

So far this year, their performance is less astounding, but still better than the rest of the stock market. Standard & Poor's REIT Composite Index is up 6 percent for the year to date. That compares with a 1.4 percent rise in the S&P 500 and a 2 percent decline in the Dow Jones industrial average over the same time.

As is often the case with any investment, especially one that's performed spectacularly, the professionals disagree about what's next for REITs.

The case against REITs is simple: The prices are too darn high.

"It's time to take profits," said David Darst, chief investment strategist of Morgan Stanley's Individual Investor Group.

The case for REITs is more nuanced.

"They're not as cheap as they were years ago -- that's an understatement," said Don Cassidy, senior research analyst at Lipper Inc. But, he said, "they still have a place for investors."

The REIT run up, of course, coincided with a booming real estate market that has resulted in national watercooler chatter about whether real estate is a bubble.

"People say, 'Real estate. Bubble. REITS bad,'" said Cassidy. REITs, however "don't buy single-family homes of the rich and famous. They buy real stuff that generates income. They don't buy it if it doesn't make sense. If the price gets too high, they sell it and take a profit."

The answer might lie in the fact that real property throughout the years has grown in value -- recovering even when other investments have soured for good -- and tend to rebound after losses. Compare that with companies, even whole sectors, that are capable of sending billions of dollars in investor money into the void. And while a corporation can disappear, land doesn't.

"Real estate is different than dot-coms," said Greg Sukenik, equity research analyst for REITs at Zacks Investment Research Inc.

Still, Sukenik said, "I certainly don't see the run up continuing," although he doesn't think a real estate crash is coming. Instead, he says a less dramatic correction is more likely.