Analyst: REIT shares overvalued as economy slows

David Harris of Lehman Brothers noted that year-to-date REITs have performed well even against the broader markets, reflecting investors' preference for REIT dividend yields in an uncertain economy.

He further noted that first-quarter earnings mostly met or topped expectations and showed that, although fundamentals are declining, it has been rather modestly.

However, the analyst believes valuations may have gotten too high.

"We would not be surprised if the sector were to retrace some of its gains as the fundamental outlook continues to weaken," Harris wrote in a research note. "We continue to believe that investors should focus on defensive and quality characteristics in their stock selections."

He highlights his "Overweight" ratings on office owners Boston Properties Inc. and Douglas Emmett Inc., mall REIT Simon Property Group Inc. and apartment owner Equity Residential, saying all "offer above average defensive characteristics."

Boston Properties shares rose 92 cents to $98.68 in afternoon trading, while Douglas Emmett's stock added 23 cents to $24.45. Simon rose 72 cents to $100.25, and Equity Residential increased $1.23, or 3 percent, to $42.88.

Yet, he points to his "Underweight" ratings on apartment REIT Apartment Investment and Management Co. and industrial developers ProLogis and AMB Property Corp., citing their leverage and transactional concerns.

AIMCO climbed $1.14, or 3 percent, to $39.11. ProLogis rose $1.21 to $62.96, and AMB increased 68 cents to $57.66.