Commercial real estate and REITs have been one of the best places for investors to find returns over the last year. As one of the hardest-hit sectors during the global credit and resulting recession, commercial real estate has rallied as the general economy has improved. However, as the broad global market has sold off in the face of the Greek and European debt woes, REITs and commercial real estate firms have fallen as well. Nonetheless, with treasuries paying next to nothing and interest rates staying ultra-low for the foreseeable future, REITs now offer an enticing blend of current yield as well as future price appreciation. For investors, now could be the perfect time to strike and add the asset class to a portfolio.
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Focusing On Yield
Investors have added more than $3.7 billion to REIT funds so far in 2011. Assets in commercial real estate mutual funds and ETFs now sit at a record $96 billion. This surpasses the previous record of $87 billion set in February 2007. Investors do have several reasons to continue to be bullish on the sector. Starved for income, REITs offer a compelling dividend play. Required to pay out 90% of their income to shareholders, the sector offers some of the highest overall dividend yields. The yield on the 10-year treasury fell below 2% this month, and the average taxable money market fund pays only 0.02%.
This contrasts with a 3.7% dividend yield for the Bloomberg REIT Index and a 9.46% yield for the internationally focused SPDR Dow Jones International Real Estate (NYSE:RWX). More importantly, these dividend payouts have been growing. Over the last two decades, traditional equity-based REITs have seen an average annualized dividend growth rate of 5.75%. Analysts predict that the asset class will see annual dividend growth rates in the 4% to 6% neighborhood over the next several years. These growth rates have trounced inflation. (For more on REITs, see The REIT Way.)
Dividend yields aside, REITs benefit from a depressed commercial real estate construction market. With the lack of new supply, occupancy levels at existing facilities are rising. This is ultimately resulting in higher rents and better cash flows for real estate companies. Lease terms and timelines are getting longer and more favorable for the real estate companies. In addition, favorable foreign currency conditions are helping increase the number of international buyers within the U.S. real estate sector.
Gaining Some Rental Income
With funds like the iShares FTSE NAREIT Real Estate 50 (NYSE:FTY) now trading well below their highs hit in July, investors may want to consider the sector once again for their portfolios. Many commercial real estate firms have been bolstered by new capital and are in much better shape than during the lean years of 2008-09. Here are a few picks that offer high dividends.
Billing itself as the "Monthly Dividend Company", Realty Income (NYSE:O) recently declared its 494th monthly dividend payment to shareholders. The REIT focuses on triple-net freestanding retail locations leased to companies like Walgreens (NYSE:WAG) and manages around 2,500 properties across 49 states. The company currently yields 5.2% and actually raised its dividends during the Great Recession. Equally, triple-net leaser National Retail Properties (NYSE:NNN) offers a 5.9% yield and similar structure to Realty Income.
Healthcare-Related Real Estate
As our population continues to age, healthcare will remain a popular theme. To that end, healthcare-related real estate should continue to do well. Both Health Care REIT (NYSE:HCN) and HCP (NYSE:HCP) offer some of the largest portfolios of hospitals, medical offices and senior housing in the country. Both offer yields 5.5% or above. Senior Housing Properties Trust (NYSE:SNH) allows investors to tap into the growing market for assisted and independent living facililties. SNH yields 6.5%. (Owning property isn't always easy, but there are plenty of perks. For more, see Simple Ways To Invest In Real Estate.)
The Bottom Line
For investors looking for high income, the commercial real estate sector is offering some big dividends. The recent market sell-off is an opportunity for investors to add REITs to a portfolio. Firms like CBL & Associates Properties (NYSE:CBL) and Liberty Property Trust (NYSE:LRY) offer dividend yields in excess of 5%.