Returns from the real estate investment trust market will decline this year, a recent study concludes.

The real estate trusts posted total returns of more than 36% in 1996, compared with 23% for the Standard & Poor's 500 index, according to the report from AEW Capital Management, Boston.

REITs, or managed portfolios backed by real estate, have seen increasing popularity with mutual funds and pension programs through the 1990s as real estate prices around the country improved.

The bundle of properties allows investors to pour money into potentially lucrative real estate but avoid the interest rate volatility of investing in mortgage-backed securities.

In 1997, returns in the sector are expected to taper down toward 10% to 12%, AEW Capital reported.

But investing in REITs is still a very attractive option, AEW noted, as management teams become more seasoned and additional capital flows into the market.

The office sector is expected to be particularly strong, especially in California, which has lagged behind the country in the recovery of its real estate markets.

The investment vehicle's recent popularity is due in part to its changing character, AEW Capital reported. The trusts are increasingly large national well-managed entities, said Martha Thurber, an analyst with AEW Capital.

They are also becoming increasingly specialized, AEW Capital reported, focusing on one property type-such as office, hotel, or residential-rather than diversifying.

These large homogeneous entities perform more consistently than their smaller regional predecessors, said Ms. Thurber. "Institutional investors are becoming aware of this," she said.

There are now more than 25 REITs with equity capitalization of more than $1 billion available for investors, compared with only one in 1993. And there are 36 REITs with market capitalization of between $500 million and $1 billion, compared with nine in 1993.

Total capital in equity real estate investment trusts is expected to more than double to $200 billion by the end of the century, AEW Capital reported.

Market capitalization for the sector has increased at an annual average rate of 55%. Pension funds have $40 billion to $45 billion invested in REITs.

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