HOW TO BUY A SKYSCRAPER

By Daniel Kadlec

If you can't buy cheap, at least don't pay top dollar. it's a commonsense strategy for any purchase, but one that remains difficult to stick with in the stock market. Even after steep declines in the past month, prices are staggeringly high. Consider that the companies that make up Standard & Poor's 500 sell for at least 30% more than what it would take to replace all their tangible assets, down to the last paper clip. That's a record premium.

Technology stocks like Macromedia Inc., Quarterdeck Corp. and Verity Inc. have been pounded down 75%. Tempting. But tech stocks are highly volatile, no place to hide if you've got the jitters. Some overseas markets, including Japan, Thailand, France, Korea and India, offer values. But the soaring dollar means U.S. investors can lose more on the unavoidable currency exchange than they make in those markets. What to do if you want to sleep at night?

One lower-risk alternative is investing in real estate through publicly traded companies known as Real Estate Investment Trusts, or REITs. These stocks earned a nasty reputation in the '70s and '80s, when REITs loaded up with debt and used the proceeds to invest largely in the higher-yielding debt--junk--of developers. REITs collapsed when the developers went bust after building too many skyscrapers.

Today's REITs are altogether different. They carry half the debt, are far better managed and invest mainly in actual property--not developers' mortgages. The stocks, while no longer cheap, have a lot going for them, including secure dividend yields of more than 6%. The security lies in the federal requirement that REITs pay out 95% of their income. The hefty dividends provide a cushion when the market falls. From March 11 through last week, the Dow Jones industrial average fell 9.8% while REITs fell just 5.4%.. During the four years through 1996, negative average returns were reported for 16% of stocks in the broad-market Russell 3000 index. That was true of only 2% of REITs.

REIT investors have enjoyed a spectacular 35% gain in the past 12 months. That's why Barton Biggs, chief global strategist at Morgan Stanley, recently cut his exposure, noting that the stocks trade for 27% more than the underlying property they own. But that premium may be justified, given that REITs make it easy to buy and sell commercial real estate for any size portfolio. Besides, property values are rising from the ashes of the '80s bust, and rents are going up too. Biggs believes REITs will return 12% over the next 12 months. Steve Hash, an analyst at Lehman Bros., notes that profit from office rentals in Los Angeles is about $12 per sq. ft. It will go to $17 before any serious building begins. In the last cycle, the figure went to $30 before the market became saturated and rents slumped, taking property values down with them. The time to start worrying about REITs is when a new development boom begins, probably years off. "Look around New York," Hash says. "There isn't a construction crane in sight."

The best prospects are in hotel and office REITs. Apartment buildings and strip centers are well into a recovery, and malls are in long-term decline, says Mike Kirby, principal at Green Street Advisors. He likes Liberty Properties Trust and Host Marriott. But in the jargony REIT world, you might stick with mutual funds. REITs aren't perfect, but they're decent cover in a shaky market.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at kadlec@time.com