Q: What is the philosophy behind creating the NAREIT indexes?

A: The National Association of Real Estate Investment Trusts®, Inc. or NAREIT, is a nonprofit organization that conducts research, investor education and policy-related activities regarding REIT investment. Our indexes, which are managed and marketed by FTSE Group, provide a means of measuring the industry’s performance. They also provide the basis for investment products, as well as benchmarks for investment managers.

Q: Why do you believe that REITs are superior to other forms of real estate investment?

A: REITs are in the business of owning and managing investment grade, commercial real estate assets and were established by Congress in 1960. The modern REIT era, though, dates back to the early 1990s. A flood of IPOs in the 1990s established the basis for the large, publicly traded industry we know today. It also created a market deep and liquid enough for large institutions to invest in REITs.

Large-scale investment in REITs by institutional investors in the 1990s and the current decade led to the emergence of a different pattern of investment returns that showed less correlation with the broader market and more correlation with direct real estate investment. Investors realized that, far from being just income producing stocks, REITs were a way of owning real estate. In fact, in the last 15 years the average correlation between REITs and the broad stock market has been only about 35%. Consequently, REITs are an excellent portfolio diversifier.

Over the past 15 years, REITs also have delivered risk-adjusted returns superior to bonds, commodities and other investments that also provide low correlation to the stock market. In fact, we have conducted research that demonstrates over the last 15 years there is no other type of investment that provides the same combination of both diversification power and riskadjusted returns as REITs.

Large institutional investors historically have invested directly in commercial property, such as office buildings, shopping centers, apartment buildings and warehouse facilities. But academic research over several time periods shows REIT investments have outperformed direct investments by signifi cant margins – up to 300 basis points – after adjusting for differences in property type mix, leverage and other measurement issues.

Q: What are the indexes that come under the NAREIT umbrella?

A: We have created several different REIT indexes that are managed and marketed for us by FTSE Group. We have the FTSE NAREIT All REIT Index, the most comprehensive index of the U.S. REIT market that includes approximately 150 REITs. The FTSE NAREIT Real Estate 50 Index comprises the 50 largest U.S. REITs.

The FTSE NAREIT Equity REIT Index is an index of publicly traded REITs that own commercial property. The FTSE NAREIT Mortgage REIT Index includes publicly traded REITs that own mortgage assets. A small group of REITs own both commercial properties and commercial mortgages and are included in the FTSE NAREIT Hybrid REIT index.

Most REITs tend to specialize by property type, so within our Equity REIT index, we have sub-indexes of REITs that invest only in retail malls, warehouses, offices or other specific property groups. For example, there are 27 REITs that are primarily retail and so they’re all in the Retail REIT sub-index. Within that group, there are three subsectors with an index for each.

Because mortgage REITs tend to specialize in either single-family residential mortgages or commercial mortgages, there are sub-sector indexes within the FTSE NAREIT Mortgage REIT Index for both home financing and commercial financing REITs.

In addition, FTSE maintains the FTSE EPRA/NAREIT Global Real Estate Index Series, which is not restricted just to REITs but also includes non-REIT real estate companies worldwide. This index is divided into North American, Asian and European sub-indexes, and country-specific indexes, as well.

Q: How do investors go about investing in REITs?

A: All of the REITs in our indexes are publicly traded companies, mostly listed on the New York Stock Exchange that can be bought like any other stock. There also are many mutual funds and ETFs dedicated to REITs, a number of them based on our indexes.

The advantage in REIT investment is access to the returns from commercial real estate investment without having to undertake the responsibilities of being a landlord. One also gets the benefit of active management that has produced such strong returns for REITs and access to a fully diversified portfolio rather than just one property and the investment is liquid. Selling an office or apartment building that you own directly is difficult, time consuming and expensive. REITs, however, are traded throughout the day on the major exchanges like any other stock.

Limited partnerships do not provide the liquidity of REITs or the investment efficiency, since they typically involve substantial management fees and may limit withdrawals. They also do not provide the same transparency. As publicly traded companies, REITs are subject to the same regulatory filing and disclosure requirements as any other publicly traded stocks.

Q: What percentage of REIT activity is in construction and development of real estate?

A: The proportion of REIT earnings derived from construction and development isn’t a fixed number. Most equity REITs will develop properties if it is more economical to develop them than to buy existing properties. There may be more or less development at any given time, depending on market conditions. Low borrowing costs in 2005 and 2006 drove up prices for existing properties, making development more attractive for many REITs. The current slowdown in private equity activity may reduce some of that pricing pressure on existing properties and make acquisition more attractive than development.

Q: The REIT structure has been primarily used for commercial buildings. Why don’t we see that in the residential housing market?