Like so many things in life, investing can be a zero sum game, one person gains from another person’s loss. The net effect is the total money on the table is unchanged. To some extent, recent gains in real estate investing have been the result of foreclosures and the loss of equity from the previous owners. There has also been an element of deleveraging where values were actually written down. It has been a difficult few years for real estate valuations in the US. However, there has been money made by Real Estate Investment Trusts (REITs). The asset class looks so promising that financial leaders including the Blackrock Group LP and the Carlyle Group are amassing billions for a shopping spree.Real estate investing is not new to these two. They have been active in the so-called private equity arena for years. Blackrock boasted $33.2 billion in real estate investments as the end of 2010, dominating their private equity book according to company records. Washington DC’s Carlyle Group reported real estate holdings of $10.2 billion at year’s end. New York-based Morgan Stanley raised $4.7 billion for a new real estate fund a year ago. Many of the new investments are being structured as REITS due to transparency and the ability to raise capital from many sources. Private-equity investing is experience headwinds as institutional investors circumvent intermediaries and do deals direct.REITs are a type of investment vehicle created by legislation 50 years ago when then President Eisenhower opened the door to broader public access to investing in the real estate market. Prior thereto, the sector was available only to the well-heeled with deep-pockets. The creation of the REIT structure allowed those of more modest means to have a seat at the table. By combining capital from many smaller sources, a REIT is able to share the benefits of the income-producing aspects and diversification benefits of investing in large real estate projects.The industry has developed over the half a century to a $1 trillion market, with $300 billion in the US and another $700 billion outside of the US, according to the National Association of Real Estate Investment Trusts (NAREIT). There are several methods for REITs to invest their capital. In the broadest sense, there are those buying equity positions in Equity REITs. Mortgage REITs lend money to property owners or buy existing mortgages. Hybrid REITs are a combination of the two. REITs were limited to mortgage type investing until the Tax Reform Act of 1986, whereby REITS were permitted to both own and manage real estate outright. Now 83 percent of US publically-traded REITS are the Equity type, according to NAREIT.A REIT must adhere to a number of special IRS conditions to qualify for tax pass-through. The REIT must pay 90 percent of taxable income to shareholders annually, invest at least 75 percent of total assets in real estate, and generate a minimum of 75 percent of gross income from real estate related investments. Whereas most REITs are publically traded, there are many that are non-listed. Whether listed for trading, those sold to individual investors must register with the SEC. They have minimum investment amounts in the low four figures, ie $1,000-5,000. Private REITS are unregistered and unlisted on a stock exchange. These are aimed at the so call ‘accredited’ investors who must pass net worth and income hurdles to qualify. This latter type of REIT has minimum investments from $100,000 to over a million depending upon the offer. These have less liquidity and transparency from the registered versions.REITs returns have been on a run. They have bounced back further from March 2009, after hitting a lower bottom, according to Jeff Benjamin of the Investment News in his April article, “How Long will the REIT Rally Last”. He noted that the Dow Jones US Total Stock Market was up 113 percent through March this year, whilst the FTSE Nareit All Equity REIT Index gained 205 percent. The REIT index fell over 73 percent from its peak whilst the S&P index had dropped some 53 percent. From my read, it is mixing apples with oranges. The FTSE may include more global real estate investments and the US Indexes were varied. None-the-less, it has been a stellar rebound. The asset class has reported a respectable return over the last year as well.For example, the Vanguard REIT ETF gained 23 percent over the last year, and seven percent year-to-date. It gained almost four percent in the last month. The Vanguard ETF tracks the MSCI REIT Index. The SPDR Dow Jones International Real Estate ETF tracks the DJ ex-US Select Real Estate Securities Index. The SPDR ETF gained around 3.75 percent in the last month, just over 1.3 percent year-to-date, and 21 percent over the last year to April 20th. The reporting of the true value of the assets supporting the indexes and hence the ETFs are time-lagged due to time required to properly assess and account for the real estate properties.It is unclear where REIT values are headed from here. Brad Case, real estate economist for NAREIT, states that the REIT Index is still 18 percent below its February 2007 high. That suggests scope for further upside. He adds that the real estate market typically follows an 18 year cycle. After the recent two years down and two years up, there might be 14 more to go upward. The attraction to REITs has been prompted by the income-producing aspect as a matter of their legislative and tax structure. Case states that the average annual dividend yield has been more than four percent. And despite the positive correlation when the markets crashed, REITs have historical been about 50 percent correlated to stock markets and a diversifying agent.The big boys at Blackrock and Carlyle seem to smell success. Billions are being attracted to the market. NAREIT reported that $34 billion was raised in 2010, of which $10 billion was through debt. Private Real Estate Funds are looking to add another $160 billion this year.These are intended to be These are intended to belonger-term investments. REIT ETFs may provide a means to pick-up gains if the surge in value continues over the shorter-term. Investors will have to wade through the numerous offerings and sectors, be they apartment or hotel REITs or industrial REITs, commercial real estate or residential REITs. According to Case, the apartment and hotel are the ‘sectors best-positioned to outperform’.He may have a point, apartment demand has increased as families were forced out of their homes. Also, in large cites the economics favored renting over buying as rental rates fell faster than sales prices.The apartment REITs sector gained 43 percent over the last year. Hotels can also adjust pricing faster as the economy improves, but gained 16 percent in 12 months. Case notes that hotel revenues are closely correlated to the GDP in the US. However, office and industrial REITs remained weak due to high vacancy rates, which may improve with a lag to the economy. Health care REITs are less cyclical and benefit from rising demographics.The REIT returns may have been gained from the losses of others. They have been able to buy-up troubled properties at a deep discount.Through this there has been a massive deleveraging in the real estate sector, minimising the debt carry. Individuals and institutions have taken hair-cuts in the sector. REITS may be a way for investors to recoup some of those losses by participating in a recovery of the real estate market, if it solidifies.NAREIT is holding an Investors Forum June 7 to 9 in New York. More information is available at reit.comPatrice Horner holds an MBA in Finance, a FINRA Series 7 License, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any products. Individuals should consult with their banker, insurance agent, lawyer, accountant, or a financial planner for advice to address their personal situations.