In Warren Buffett’s 2011 annual shareholder letter, Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) legendary leader admitted he was “dead wrong” about his prediction of a rebound in the real estate market for 2011. Yet he remains bullish.
Then again, Berkshire has lots of exposure to the market, with companies like Clayton Homes, Acme Brick, Shaw, Johns Manville and MiTek. Last year, they produced pretax profits of $513 million. However, that was down from $1.8 billion in 2006 — when housing hadn’t yet collapsed.
Then why is Buffett hopeful? His analysis is fairly straightforward. He believes that housing construction ultimately matches the growth in household formation. According to him: “Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”
So if the Oracle of Omaha’s logic works for you, what are the most effective ways to play a rebound in real estate? One approach is to invest in mutual funds and exchange-trade funds (ETFs). Here’s a look at some good options:
Ken Heebner, who manages funds like CGM Focus (MUTF: CGMFX) and CGM Mutual (MUTF: LOMMX), is one of the world’s top investors. But since 1994, he also has managed the CGM Realty (MUTF: CGMRX) fund. And his track record has been particularly strong. Over the past decade, the fund’s average annual return was 18.59%.
Heebner also likes to take big bets. Consider that the portfolio is fairly concentrated, with just 19 holdings. Some of the top ones include Simon Property Group (NYSE:SPG), Home Properties (NYSE:HME) and Public Storage (NYSE:PSA).
Cohen & Steers Realty Shares
The Cohen & Steers Realty Shares (MUTF: CSRSX) fund also has a long history. Its portfolio managers, which include Martin Cohen and Robert Steers, have been operating the fund since the early 1990s. And yes, the performance record has also been strong. Over the past 10 years, the fund’s average annual return was 11.82%.
Cohen & Steers takes a value approach to investing and engages in detailed analysis of local markets. But it also looks at long-term growth trends, such as the need for health care properties.
Neuberger Berman Real Estate
Steve Shigekawa and Brian Jones came on board the Neuberger Berman Real Estate (MUTF: NREAX) fund in October 2008. No doubt, it was an ominous time in real estate. But since then, the fund has clocked an average annual return of nearly 40%.
The portfolio managers scour the markets for attractive discounts. They also tend to focus on a small group of investments, say 30 to 50 or so. Some of the top holdings include Simon Property Group, Boston Properties (NYSE:BXP) and Public Storage.
iShares Dow Jones US Real Estate
The iShares Dow Jones US Real Estate (NYSE:IYR) ETF tracks 80 stocks, which include real estate investment trusts (REITs), mortgage companies and timber operators. The top holdings include Simon Property Group, American Tower (NYSE:AMT) and Public Storage.
The IYR ETF has a dividend yield of 3.59% and also has a large amount of trading volume, with an average of 5.2 million shares a day.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.