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Personal Finance > Investing
REIT boom seen busting
February 13, 1998: 12:07 p.m. ET

Impending shake-out or continued strength? The jury is still out
From Correspondent John Defterios
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NEW YORK (CNNfn) - Donaldson Lufkin & Jenrette (DLJ) has downgraded its rating on the entire real estate investment trust (REIT) sector from "outperform" to "market perform," citing uncertainty over changes in the way governmental regulators treat REITs.
     Some took the downgrade as yet another sign that the boom days of REITs -- including Starwood Lodging Trust, the recent purchaser of hotel giant ITT and other chains -- are waning.
     "What's changed most recently is that now there's a tremendous amount of capital available for real estate," said Lawrence Raiman, REIT analyst at DLJ. "Hence, there is starting to be new development, occupancy rates are full and we view the real estate business to be edging closer and closer to peak cycle." [161Kb WAV] [161Kb AIFF]
     Starwood Lodging, now perhaps the most famous of all REITs, made use of its rare "paired-share" tax structure to snatch ITT Corp. and its prestigious Caesars casino chain from Hilton last year.
     The paired-share arrangement allows Starwood to combine the operations, assets and stock trading of both the REIT, which holds the actual properties in trust, and the company's tenant property operation arm, which leases the properties from the REIT and accrues rental income.
     Although government regulations allow only Starwood and three other REITs to operate under the paired-share structure, President Clinton proposed on Jan. 29 to limit their special growth by prohibiting paired-share REITs from acquiring any new properties.
     If the proposal succeeds, trusts like Starwood will be able to complete any pending transactions, but no new expansion would be allowed.
     In addition, the commercial real estate market seems to be undergoing a quiet revolution as privately held properties valued at billions of dollars go up for sale on Wall Street in the form of REITs.
     The exploding REIT industry is heading for a shake-out period as increasingly tough real estate markets force REITs to adapt or go under, according to some analysts.
     But despite Wednesday's blanket downgrade by Donaldson Lufkin, demand for REITs is expected to remain strong.
     "Now that the Baby Boom generation has tipped into the 50's, they are starting to think about all that money that has been growing in the 401(k) or the Keogh [plan] at work, and saying 'I want to live off of this,' " said Greg Smith, chief investment strategist at Prudential Securities. "And to live off it, you need to get the income portion up."
     The average yield on REITs is 5.5 percent, much higher than the 1.5 percent yield on the S&P 500. The total yield of Morgan Stanley's REIT index is a substantial 17.5 percent.
     Based on these high returns, Smith recommended that a model portfolio should invest approximately a quarter of its total assets in REITs. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.