Congress created REITs in 1960, and the industry has enjoyed periods when it was enthusiastically accepted by investors and endured trying times when it was out of favor or merely misunderstood.

Ralph Block, CEO of Essential REIT Publishing and author of the book "Investing in REITs," recalls that the industry got rolling in the late 1960s with the emergence of construction lending REITs. "The first REITs grew because they were able to provide dividend yields greater than 10 percent," he says. "They did reasonably well and attracted individual investors. There was no institutional ownership back then because it was a small industry with a total market cap of less than $1 billion."

Many builders and developers, though, were badly hurt when interest rates began to surge and oil prices started to skyrocket in the early 1970s. As a result, many construction-lending REITs lost 80 percent to 90 percent of their market value within a fairly short time. Some of the initial investors took big hits and, for many, the sting still lingers.

In the 1970s and 1980s, real estate limited partnerships captured investor interest, and REITs remained in the background. "Not a lot happened with them," Block says. Some other key issues dominated the financial press including the savings and loan crisis and the Resolution Trust Corporation bailout in the late 1980s and early 1990s. As late as 1991, individuals were the primary investors in REITs, Block says. Institutional investors, so prevalent today, were not in the game.

Growth in Listed U.S. REIT Industry Equity Market Capitalization January 1972–September 2004 In Billions of Dollars

Source:NAREIT

"Institutional investors were concerned because at the time the industry was small and there was very little liquidity," Block says. "Another problem was REIT managements then didn't do a good job running public companies."

In the period from 1992 to 1994, things began to change. Firms that went public during and since that time are different from the earlier REITs because they were self-advised and self-managed from the beginning, meaning they were not passive property owners that turned over daily management of properties to third parties.

The industry expanded rapidly during the 1990s. However, even though several large firms, such as Simon Property Group (NYSE: SPG) and Kimco Realty Corporation (NYSE: KIM), emerged, institutional investors were still slow to jump in.

"REITs were a pretty new phenomenon," Block recalls. "Institutions could see more liquidity, but they were unsure whether REIT stocks would act more like real estate or more like other equities, and whether managements would create value for shareholders."

Individual investors came into the industry in significant numbers during the mid 1990s. The flow of money into REITs reversed near the end of the decade when investors realized REITs were not high-growth vehicles like Internet and tech stocks. By mid-2000, however, the tech bubble had burst, and investors sustained substantial losses from tech-heavy portfolios. In retrospect, an important moment for the REIT industry had arrived, Block says.

"You had investors getting burned in the bear market who were becoming interested in dividend yields and the predictability of cash flow," Block says. "Also, financial planners wanted their individual investor clients to have more diversified portfolios. And the institutions were beginning to say they wanted to increase their allocations to real estate."

Certainly, misperceptions about the industry persist and the taste of some individuals' bad experiences during earlier periods won't easily wash away. But REIT performance continues to rebut false ideas, erase bad memories and confirm Ibbotson's findings.