After shunning real estate investment trusts last year,
investors are rebuilding their positions in companies that buy
and rent real estate.
REIT ETFs have been among the few sectors beating the stock
market so far this year.Vanguard REIT Index (
), the largest in its category with $22 billion in assets, has
jumped 11% year -to-date, far surpassing the SPDR S&P 500's (
) 1% gain. It's a remarkable turnaround after adding only 2% when
SPY popped 32% in 2013.
IShares Residential Real Estate (
) has also vaulted 13% year-to-date, while IShares Cohen
&Steers REIT (
) is up 12%.
Investors have been flocking to income-generating assets as
interest rates fell this year despite the Federal Reserve's plan
to scale back its unprecedented economic stimulus, which was
expected to lift interest rates. Yields on benchmark 10-year
Treasury notes are down 28 basis points so far this year to 2.72%
as of Wednesday from 3.00% at the start of the year.
"The average public REIT has a yield of 3.5% -- much better
than other alternatives and more sustainable if the economy does
recover from its current anemia," Christian Wagner, CEO of
Longview Capital Management in Wilmington, Del., said in an
email. "Builders continue to bring more product online due to low
costs of funds. And in the event that we do have a significant
upturn, their inventory will be sufficient to fulfill
VNQ currently shows a 12-month yield of 2.9%, REZ 3.6% and ICF
3.2%, according to Morningstar. Among the biggest holdings in
VNQ,Simon Property Group (
) is up 10% this year,Public Storage (PSA) 13% andPrologis (PLD)
12%. Top gainers among VNQ's 131 names areAshford Hospitality
Trust (AHT), up 28%, andCamden Property Trust (CPT), up 20%. They
each account for less than 0.5% of VNQ's assets.
REITs such as Simon, which invest in shopping centers and
retail locations, should benefit from rising consumer spending
and retail sales anticipated over the next year, says Robert
McMillan, an analyst at S&P Capital IQ.
"Most of the retail REITs have long-term leases with their
customers, with embedded rent adjustments that should help
insulate them from economic fluctuations," he wrote in an equity
report April 5.
"We expect tight credit conditions, though not as restrictive
as they were at the height of the financial crisis in late 2008
and 2009, to continue to squeeze smaller, undercapitalized
players from the market as larger retailers seek to do business
with shopping -center operators that can execute in a still tight
and volatile credit environment."
Although REITs are heavily indebted, their mortgages are
secured by the underlying properties -- which makes lenders
amiable to refinancing the debts, McMillan added. But traditional
brick-and-mortar stores could suffer if online shopping continues
to win over customers. Retail landlords would have to focus on
expanding overseas, which entails more risks, wrote Todd Lukasik,
an analyst with Morningstar, in a report dated April 8.
Real estate ETFs have absorbed $2.25 billion year -to-date
after taking in $3.21 billion last year, according to ETF.com.
Should interest rates start to rise, investor inflow into REITs
may reverse and lower their stock prices.
IHS Global Insight economist Paul Edelstein expects the Fed to
lift rates in September 2015 upon reviewing the Fed's minutes
from the March 18-19 meeting, which "offered little new