Global REITs poised for growth? By: Bruce Eidelson Russell Investment Group March 2007 While growth of the domestic REIT market may have peaked, as judged by recent consolidation, REIT markets outside the United States appear poised for growth. Real Estate Investment Trusts (REITs) are real estate stocks listed on major exchanges. REITs invest directly in office, retail, industrial, apartment and other income-producing properties. So long as REITs distribute a specified percentage of income to investors as dividends, they are not subject to corporate taxation. As such, REITs offer investors an efficient way to invest in commercial real estate. They typically offer potentially attractive yields and greater liquidity compared to investing in property directly. A brief history of REITs Although introduced in the United States in 1961, it wasn't until the early1990s that REITs hit their stride. From less than $10 billion in equity market capitalization in 1990, REITs grew to over $400 billion by the end of 2006. Many investors were attracted by the returns for the REIT sector. U.S. REITs in the broad-market Russell 3000® Index returned an annualized 13.6 percent over the past 10 years. Over the past three years, U.S. REITs' annualized return has been in excess of 23 percent. There are signs, however, that the rapid growth phase of the U.S. REIT market may be over, at least for the time being. Blackstone Group's recent private buyout of U.S. office building owner Equity Office Properties Trust for $39 billion ranked as the biggest takeover of a real estate company and one of the largest private equity deals ever. Fueled by strong demand from private equity real estate buyers, this transaction capped a merger and acquisition trend that has dominated the U.S. REIT market during the past two years. With growth of the U.S. REIT market flattening out, the international markets are offering more options. An increased number of countries with REIT-like structures, merger and acquisition activity, and cross-border investing indicate that global REITS are on the rise. New REITs emerge In addition to the mature REIT markets of the United States, Canada, Australia, Netherlands and Belgium, REITs recently have been introduced in a number of other countries, including Japan, France, Singapore and Hong Kong. The United Kingdom launched REITs on Jan. 1, 2007, and Germany and Italy are expected to follow suit later this year. This activity is stimulating growth in the securitized real estate sector in these countries, including several initial public offerings. Consolidation influences investment decisions Merger and acquisition activity is generally a positive sign of a dynamic marketplace. However, increasing concentration of ownership in the U.S. REIT market, evidenced by some 23 deals announced in 2006 worth over $90 billion, could lead many investors to look beyond U.S. borders to place incremental allocations of capital to REITs. Cross-border investing helps smaller markets In smaller markets, such as Australia, where there is a limited supply of high quality domestic real estate and a high level of securitization, real estate investors must look beyond their borders to place capital. Westfield, for example-owner of Southcenter mall in Tukwila, Wash.—is an Australian company with the majority of its assets outside its home country. One advantage of investing in global REITs is the benefit of diversification. Real estate markets around the globe are affected by supply and demand factors that are highly localized. Because correlations of returns between markets are relatively low, even lower than for global equities, there are significant diversification advantages to investing in REITs on a global basis. However, please remember that diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Evaluating REIT opportunities How can the individual investor evaluate REITs, including global ones? Just like any stock, investors should evaluate the quality of the company's management, the clarity of its investment strategy, and its history of dividends and dividend growth. With REITs, it is also important to understand where the company owns assets and the investment fundamentals in those markets. For example, REITs that hold office properties in the top three domestic markets—New York, Washington, D.C. and Southern California—may sell at a premium, but could still represent a good investment opportunity based on growth prospects. The same is true of leading non-U.S. markets, such as London, Paris and Tokyo. Of course, the downside of opportunity is risk. Similar to international stocks, the risks of investing in non-U.S. REITS include limited public information, less liquid trading, and geo-political issues. So, while it may pay to "think globally," investors will also want to weigh carefully the opportunities and challenges. Bruce Eidelson is director of Real Estate Portfolio Management for the Tacoma-based Russell Investment Group. This article is part of a monthly series of columns by Russell analysts. Eidelson has been at Russell since 1999. Fund objectives, risks, charges and expenses should be carefully considered before investing. For a prospectus containing this and other important information call Russell at 1-866-676-7680 or go to the prospectus and reports page to download one. Please read the prospectus carefully before investing. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes and tax laws and interest rates all present potential risks to real estate investments. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Russell 3000® Index: Measures the performance of the 3,000 largest U.S. securities based on total market capitalization. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Effective July 1, 2006 Frank Russell Investment Company changed its name to Russell Investment Company ("RIC"). RIC Funds are distributed by Russell Fund Distributors, Inc., and advised by Russell Investment Management Company ("RIMCo"). Effective July 1, 2006 RIMCo changed its name from Frank Russell Investment Management Company. The Russell logo is a trademark and service mark of Russell Investment Group. Russell Investment Group, a Washington, USA corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company. Securities distributed through Russell Fund Distributors, Inc., member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. Copyright © Russell Investment Group 2007. All rights reserved. Date of first use: April 2007 RFD 07-6675			Expert INSIGHTS Read more Russell market analysis.   The Power of RUSSELL AND YOU Learn more about Russell's investment approach.   Investment PRODUCTS LifePoints Funds Russell Funds Separate Accounts Institutional Funds   Printer friendly version of this page Send feedback or comments Site Search

WWW.RUSSELL.COM     INSTITUTIONAL INVESTORS     FINANCIAL PROFESSIONALS     INDEXES     SITE MAP    

© Russell Investments 1995-2008. All rights reserved.
Legal Information.    Privacy Statement.