hen is an investment in real estate not necessarily an inflation hedge? When it's a real estate investment trust, or REIT.

A REIT is a company that manages a package of real estate investments. It's diversified, like a mutual fund. The REIT's shares are traded on the stock exchange. It's an unusual hybrid that allows investors to put some of their portfolio into real estate without having to actively manage the property. Nor does it involve the financial wherewithal typically required in large real estate investments. And since REITs invest in a number of properties, the entire investment isn't sabotaged if one property falls into disarray.

Equity REITs buy property and pass the income and capital gains on to shareholders. Mortgage REITs loan money to developers and others in the real estate market. Hybrid REITs do both. Several mutual funds are available that invest in REITs.

Barry Vinocur, editor of Realty Stock Review, concerns himself only with equity REITs, which might invest in property such as shopping malls, apartment buildings or hotels. REITs are exempt from federal tax. They must pay out 95 percent of their income earnings as dividends.

Although Vinocur gives a qualified endorsement to REITs, he is aware that investors could get sucked into believing they are incredible investment opportunities, promising secure returns for years to come.

The facts are that REITs, like other investments, rise and fall sharply with the economy. They were hot investments during the latter half of 1996, but the return through the first nine months of 1997 was about 11 percent. In fact, REITs trailed the performance of the Dow from 1994 through 1997, and the Standard & Poor's 500 from 1992 through 1997.

The two most compelling arguments for REITs are these:

But whereas the income from dividends once provided the bulk of the total return, that balance has shifted as the REIT market has boomed over the past several years. In the period from 1972 to 1996, income accounted for 67.8 percent of total return, with capital appreciation - or increase in stock price - accounting for the rest. But in 1996, only 17.2 percent of the total return came from income. "So what that means is that capital appreciation is so much more of total return now," which reduces the stability, says Vincour.

Vinocur acknowledges that REITs have a low correlation to stocks as measured by the S&P 500 for large-company stocks and the Russell 2000 for small caps. What annoys him, though, is that those who push REITs - and the real estate mutual funds that invest in them - then go on to talk about their low betas.

Back in July 1996, when the stock market corrected, REITs didn't go down as much as the market and its proponents began making a case for them as a haven. "Everyone was screaming that REITs were a port in the storm," Vinocur says. But in the spring of 1997, when the market corrected again, "some of the high-octane REITs went down much more than stocks," Vinocur says. "The broader market correction was deeper but more short lived. The REIT correction started in late March and it wasn't until June that REITs started to move back up."

Vinocur does think REITs are a good investment, though. President Eisenhower signed the legislation that created REITs in the 1950s but they are only now coming into their own. And the ones that Vinocur likes best are those that will profit from what he thinks will be consolidation in the industry.

In the early 1990s, many old-line real estate families began to transfer their real estate into REITs to defer taxes. "These forces will change the real estate industry forever," Vinocur says. "We will end up with very large companies with very large market capitalization."

Vincour likes REITs that are poised to profit from the consolidation he sees coming. "I don't think that every stick and brick in the country will end up in a REIT," Vinocur says. "But a REIT is a very efficient vehicle for owning real estate. And the real estate industry is going through a critical transformation right now."