According to the LA Times, the sliding commercial real estate market has an upside for investors: Buying shares in publicly traded real estate investment trusts.

REITs-which outperformed stocks over the past 10 years have lost some of their investment luster recently due to investor fears that market values of the properties underlying commercial REITs this year will go down, fears that have been fueled in part by the sub-prime mortgage problems and the residential market downturn.

Though most REITs hold actual real estate, one type holds mortgages on commercial (and occasionally residential) properties.

Since January, share prices of mortgage REITs have dropped 51%, which is more than three times the average 16% decline for equity-based REITs.

The fear factors mentioned above have adversely affected the price of many commercial property and mortgage-backed REITs. REIT shares-which typically sell for a modest premium over the estimated value of the real estate in the REIT’s portfolio-have recently been selling for about 20% less than their net asset values, a trend that is leading many financial advisors to suggest their clients to buy REIT shares now.

For one thing, according to the REIT trade group, returns from REITs have averaged nearly 11% over the last 35 years.

And, unlike most publicly traded companies, REITs offer a special tax break in that they are required by law to distribute at least 90% of their income to shareholders each year. In practice, most REITs, which pay corporate taxes on only that portion of their income not paid out to investors, pay out 100% of their annual income.

REIT yields can be especially attractive for retirees seeking regular income from their investments, but can pose a tax problem for those investors who prefer to have money accumulate rather than receive it as income now.

Tags: commercial real estate investments, real estate investment trusts, real estate investors, REITs

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