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Tickers in this Article: RWX, RWO, IVV, SPG, ZION, WAL, IYR, RWX, NNN, O
As the global credit crisis unfurled, nothing was hit harder than real estate. Many of the CDO's and asset-backed securities were created on the notion that real estate prices never fall, and as they did it compounded the problems for the sector. Starting in 2007 and continuing through the early parts of 2009, the sector saw prices fall by nearly 40%, as it is highly correlated with consumer spending and economic health. The benchmark S&P 500 (NYSE:IVV) declined by 24% during the same period. But as the economy is maybe turning a corner, so could be the fate of real estate assets.

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Rents Stabilize
Even though the recent Case-Shiller residential housing index fell 3.2% in April, it still is well above previous year's numbers and the crisis lows. Commercial real estate, feared as the next shoe to drop, is also showing signs of improvement. Research firm Reis recently reported that average rents in the commercial property office sector dropped just 0.8% in the first quarter of 2010, compared with the last quarter of 2009. Of the 79 markets the firm tracks, rental rates were stable or increased in 23 regions. Three months ago, rents in 70 tracked markets fell. There could be much debate about whether this is a bottom or not, it does show that things are improving.

While low interest rates have been a headache for fixed income investors, they have given many cash strapped developers the ability to refinance at lower rates. Unlike subprime borrowers, banks are more likely to adjust commercial real estate loans rather than allow defaults. In addition, some well managed real estate firms such as mall operator Simon Property Group (NYSE:SPG) have gone on spending binges picking up properties and rival s at cheap prices.

A Diversification Addition
Many investment professionals advocate putting a small portion of a portfolio into real estate as a diversification tool. Historically, real estate assets have provided a hedge against inflation and volatility as well as provided increased income potential. The credit crisis took some of strength out of this theory in the short term, however over the long term, adding real estate assets to a portfolio still makes sense. There are many ways to add this weighting to portfolio. Investors could even bet on banks with large weightings in commercial real estate loans such as Western Alliance Bancorp (NYSE:WAL) and Zion Bancorp (Nasdaq:ZION). However, there may be better, less risky options.

Investors wanting to add a one-two combo in the sector can pick up two exchange traded funds that give broad access to the world's real asset markets. Focusing on the domestic side, the iShares Dow Jones US Real Estate (NYSE:IYR) follows 76 of the largest REIT companies that are domiciled in the United States. The fund has produced returns of an annual 9.22% since its inception in 2000 and has been bear market tested. The fund provides a distribution yield of 3.88% and charges 0.48% in expenses. Those investors who want to add international real estate to their portfolios can do so with the SPDR Dow Jones International Real Estate (NYSE:RWX). The fund holds 131 various international REITs, with much of the focus on Asia and Europe. The fund does include, albeit minimal, some holdings in emerging markets such as China and South Africa. The fund yields 4.59% and charges 0.59% in expenses.

One of the better investments in real estate of the past few years have been those firms that have a high percentage of rentals via triple-net leases. These real estate owners saw their prices drop by only 15% or so versus the 40% decline discussed earlier. Triple-net leases are long-term contracts in which the tenants take responsibility for maintenance, taxes and insurance on the property, leaving the owners off the hook for these expenses. Individual REITs, such as National Retail Properties (NYSE:NNN) and Realty Income (NYSE:O) has provided investors with increasing dividends during the financial crisis as well as some stability.

The Bottom Line
The credit crisis hammered real estate assets to unseen levels, but as the economic storm seems to be easing, the sector can be viewed as rip with bargains. The broad exchange traded funds like the SPDR Dow Jones Global Real Estate (NYSE: RWO) and corresponding triple-net leasers are a great way to tiptoe back into the sector. (For more stock analysis, take a look at 4 Reasons To Pass On The Toys "R" Us IPO.)

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