Investors - who plowed 627bn into mutual funds dedicated to real estate investment trusts (Reits) just last month - seem to be pocketing some profits.

But, even as Reits fall from four-year highs, market watchers do not see a bursting bubble. In fact, the dip in share prices comes at a time when the industry's fundamentals can only improve.

''[Funding] from operation [or earnings] growth is going to increase over the next couple years, where it's been decreasing until now,'' said Charles Lowrey, chief executive of Prudential Real Estate Investors. ''We're bottoming out.''

In previous downturns, the real estate industry suffered even as others recovered because it was overbuilt. This time, developers kept supply in check, so a rebound in demand could immediately boost property company earnings.

There are still short-term risks. As job growth stagnates, office and apartment rents and occupancy rates, for example, will be flat to down through 2003, according to analysts. And investors are beginning to sell their defensive holdings in order to buy growth stocks.

However, there is support for improved Reit earnings and share prices in the long term. Resilient consumer spending has already helped retail landlords weather the downturn. Industrial Reits are beginning to see an slight increase in leasing activity, and apartment Reits should benefit from rising interest rates, which slow the pace of homebuying. As soon as companies begin to hire again, office Reits will be able to fill their buildings and raise rents.

Even if investors aren't attracted by the improving fundamentals in 2003, Reit stocks will get a boost from demographic trends and shifts in investor sentiment.

An ageing Baby Boom population means strong demand for income-producing securities over the next several decades. Reits are required to hand out about 90 per cent of their profits in dividends, and the average yield is about 6.6 per cent. That compares with 4.8 per cent for 10-year Treasuries and 1.7 per cent for the Standard & Poor's 500, Steve Sakwa, Merrill Lynch Reit analyst, noted.

Property companies have also become more attractive in the wake of recent corporate scandals because, unlike Enron and Worldcom, ''they are easily understandable and they have clear financials'', Mr Lowrey said.

Given the sharp rise in Reit stocks in 2001 and the first half of this year, ''I don't think there are any great bargains out there,'' Mr Lowrey acknowledged. ''But you're certainly not buying at the top.''

Financial Times