A two-week rally in July sent the Morgan Stanley REIT Index up 6 percent, bringing the increase so far this year to 12.3 percent — compared with a 1.9 percent decline for the Dow Jones Index. But the perception does not fit the reality, some analysts say.

Indeed, storm clouds are gathering. The latest warning sign comes from Smith Barney analyst Jonathan Litt, who in a recent report illustrated how REIT dividend yields — what many point to as the prime factor driving the rally, are no longer at a premium compared with other options. Litt says in the report that, with REIT dividend yields at 4.5 percent overall and 3.2 percent adjusted for taxes, 88 companies within the S&P 400, 500 and 600 offer comparable returns. In 2003, just 27 had comparable returns.

“We can no longer explain the REIT rally as a function of investors thirst for yield,” Litt says. The REIT analyst has a “flat to down 10 percent” view for REITs in 2005, although he added, “there is nothing imminent to derail the rally.”

Litt's not alone. According to a recent Morgan Stanley report mall and shopping center REIT cap rates are at their lowest levels since 1996. Retail REITs are trading at a 10 percent premium to underlying net asset value.

REITs have taken advantage of their popularity to hit the market up with new IPOs and secondary offerings. Through the first six months of 2005, 107 total offerings raised $17.6 billion. In the past two years, there have been 35 REIT IPOs compared with just 13 in the previous five years combined. (That is eerily reminiscent of the Internet mania: In 1999, 292 IPOs raised $24.1 billion. In 1998, 45 IPOs raised $2.1 billion.)