REITs Should Plan for Long Term

REITs have become a preferred way to invest in commercial real estate thanks to their liquidity, returns, professional management teams and access to capital, according to Glenn Mueller, professor at the University of Denver.

Mueller discussed the REIT approach to real estate investment in a video interview with REIT.com in New York at REITWeek 2012: NAREIT's Investor Forum.

"A REIT is very much like a mutual fund," Mueller explained. "You pool a bunch of investors together, have their money under professional management and that professional management is making individual investments. In REITs, it's in individual properties with a strategy. You get focused management, a better capital structure and a large diversification of properties in the investment, as opposed to buying one property in one city, which gives you concentration risk."

Mueller is currently researching volatility in the REIT market. He said his work has shown that the increasing volatility has resulted from REITs' inclusion in exchange traded funds and their corresponding derivatives. He noted that volatility has gone up "a great deal" across the entire stock market over time.

"If you look at their earnings and the actual value that is there over the long term, the returns have been very good," Mueller said. "Fundamentally you're buying something that is going to have good long-term income plus, historically, good long-term price appreciation. The daily, weekly and monthly fluctuations that we're now seeing because of the publicly traded REITs being subject to these derivatives is... noise in the marketplace. For the fundamental investors who bought it and put it away for 10 years, they would look back and be very happy with what has happened to their investment."

As the global economy continues to recover at a slower than expected pace, Mueller advised REIT management teams to ignore quarter-to-quarter performance and fluctuations and take a long-term perspective when it comes to planning. Most importantly, they should assemble a "good quality portfolio that is going to provide long-term income increases and value increases," according to Mueller.

"Focusing on the long term, as opposed to the short-term fluctuations, is what will win the race in the long term," Mueller said.