REITs have been beaten down like everything else during the second half of 2007. But as the graph Prime Properties reveals, theyve continued to fare well versus the S&P 500 as a whole.

One of the main reasons for REITs falling share prices is concern over property values. As foreclosures have skyrocketed and the inventory of unsold homes hit its highest level since World War II, property values around the country have fallen drastically. And it doesnt look like that trend will abate anytime soon, with industry groups projecting another $1.2 trillion of lost property value next year.

Thats bad news for home owners, but it really doesnt affect REITs. Thats because theyre in the business of owning commercial real estate, which typically doesnt experience the same price volatility as residential property. Also, REITs rarely realize losses due to property value declines because they hold for the long term. They make their money from collecting rents rather than on real estate speculation.

Share prices have also been adversely affected because some REITs in the financial sector have taken hits because of subprime debt, which has led to the assumption that more problems must be lurking. Although theres no denying that nows not the time to own most of the purely financial REITs, the property REITs arent in any imminent danger because they just dont dabble in lending.

These concerns have coalesced to create a tremendous buying opportunity in property REITs. Theyre all trading well off their historic highs and price-to-book values. And REITs, structured as pass-through entities, are sporting substantial dividend yields because they have to pay out at least 90 percent of their income to investors.

Another high point for REITs is that they provide exposure to almost any type of real estate, from high-end hotels to campgrounds, multi-family apartment buildings to hospitals and prisons. And that exposure isnt limited to US property, which is seeing some of the worst volatility, but abroad as well.

Almost every developed country in the world has some type of a REIT structure, and the emerging markets are moving in that direction as well. China has even announced that it will create a REIT system, though an exact rollout date has yet to be set.

There are two reasons to invest in REITs now. First, theres little downside risk left because concerns about bad debt and falling property values have been more than priced in by the markets. Second, by getting in now youre setting yourself up for a likely flurry of M&A activity in the sector next year.

Because prices are off by so much, some of the smaller, mid-market REITs will probably be too tempting for their larger peers. That means you can get in now for good yields and could get bought out at a premium over the next year or so.

Prologis (NYSE: PLD) is one REIT that looks as though it may be an acquirer next year. The operator of an international network of distribution centers, the company owns key real estate around most of the major air and sea ports in North America, Europe and Asia.

In an era of just-in-time inventory management, Prologis services are in high demand because its strategic locations and unique inventory control systems allow clients to move product with the click of a mouse.

Those qualities have translated into annual funds from operations (FFO, the key measure of REIT success) growth exceeding 36 percent. And although its yield has hovered in the 3 percent range, it will rise with Prologis income because of the REIT payout requirement. Buy Prologis below 75.

Digital Realty Trust (NYSE: DLR) is another REIT benefiting from innovations, owning and operating a collection of 66 data centers catering primarily to large businesses. This is a growing business because companies have realized that, in the 21st century, a reliable Web presence is a must. But maintaining a data center is an expensive endeavor that requires highly specialized technology, so the recent trend has been to outsource that task to a company such as Digital Realty.

That trend has led to quarterly revenues growing at an almost 54 percent pace and trailing 12-month sales rising by 46.6 percent. Company insiders are also strong believers in Digital Realtys business model, with top executives owning more than 19 percent of the companys shares. Yielding 2.8 percent, Digital Realty Trust is a buy below 43.

Investors Real Estate Trust (NSDQ: IRETS) has become a pure value play as its been sold off with the rest of the REIT market. It owns a collection of apartment complexes as well as commercial and industrial properties throughout the Midwest. Investors were a bit spooked by its third quarter earnings release when it was announced that occupancy rates had fallen off at its retail holdings. But that loss was almost entirely offset by solid growth in industrial property tenancy.

Investors Real Estate has also seen strong FFO growth, rising at an almost 25 percent pace. That pace should be sustainable because there are several new apartment and medical complexes in their development pipeline with more than 85 percent of available space already leased. Yielding almost 7 percent, Investors Real Estate Trust is a solid buy below 11.

Benjamin Shepherd is research editor for PF.