Lee Schalop, real estate analyst at Banc of America Securities, pointed out in a recent Real Estate Weekender that REIT stocks are currently cheaper than they appear. Schalop uses the Morgan Stanley REIT Index (RMS) as an example of where REIT stocks appear more expensive than they are. Because the values of total return REIT indices, like the RMS, increase with the amount of dividends paid, the value of the indices rise even when the value of the stocks in the index do not. In 2002, the RMS increased 3.6 percent even though the value of the stocks in the index actually declined between 3 percent and 4 percent. Year-to-date 2003, the RMS is up 23.7 percent, but the stocks have risen 19 percent.

NAREIT Equity Price Index vs. Total Return Index 1/31/94 – 8/31/03

Source: NAREIT and Banc of America Securities.

Schalop says that most REIT indices are below where they were at the previous peak in 1997 on a price-only basis even though the total return indices are at new highs. So in reality, the index is actually below the 1997 peak, Schalop says. The chart below, outlining totals for the NAREIT Equity Price Index (price returns) and NAREIT Equity Index (total returns), helps demonstrate the differences between price return and total return indices. The NAREIT Equity Price Index was 314 at the end of August, 6 percent below its December 1997 peak of 333, while the NAREIT Equity Index hit 4,284 at the end of August, an all-time high.