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You Can't Take The Risk Out Of Rei Ts



Real estate investment trusts are back. Slammed in the mid-'70s, battered in the early '90s, REITs have risen again, transformed this time into investment vehicles that could have a salutary effect on the often vicious real estate cycle. The promise is of a new way to finance, value, and manage commercial and residential real estate that could lead to a stabler market. While the REITs of the 1980s and early 1990s were built on private bank financing, today's REITs get public financing via IPOs. Permanent investor equity, active owner-managers, and new accountability to public shareholders distinguish the new REITs from their ancestors. That is the theory, and it makes sense, up to a point (page 78).

The worry is that these larger, more aggressive REITs will just attract a different group of suckers who buy in at the top of a frothy market and are left holding the bag once the inevitable downturn occurs. No one can do away with business cycles. No one can stop public markets from overshooting. And owner-managers can make the same dumb mistakes as hired managers.

With all these caveats, today's REITs are a welcome vehicle for individuals to participate in investments that only the big guys could afford in years past. Now, if these investors could only remember that large rewards are always associated with big risks....

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