REITs Could Rebound from Here

By Tom Lydon, ETF Trends

Real estate investment trusts and related exchange traded funds have weakened in response to rising rate concerns. However, fundamentals may still support the market.

Over the past three months, the Vanguard REIT ETF (NYSEArca: VNQ) fell 8.9%, SPDR Dow Jones REIT ETF (NYSEArca: RWR) decreased 8.4% and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) declined 7.9%.

Citigroup’s Michael Bilerman argues that after the sell-off, REITs have become increasingly attractive to net asset values, bonds and broad equities, reports Teresa Rivas for Barron’s.

Specifically, Citigroup analysts point out that healthcare REITs look better after the upward movement in interest rates weighed on recent performance. The sub-sector is especially sensitive to change sin rates because of its elevated external growth expectations and spread investing.

Hotels and lodging-related REITs also have solid fundamentals that remain intact, with improving demand, and will support the group through the second half of the year, Citi said.

Office REITs were weak over the second quarter, but Citi argues that the group could present opportunities for outperformance.

Citi is also overweight residential REITs as growth and valuations remain attractive. While new supply is coming online, demand for rental apartments is still high – recent data showed that apartment occupancy rates are at record highs.

Lastly, Citi sees increased demand among strips or mall-related retail REITs.

The various broad REITs ETFs allow investors to capture diversified exposure to these these sub-sectors. For example, VNQ includes 13.2% healthcare REITs, 7.4% hotel & resort REITs, 16.3% office REITs, 16.8% residential REITs and 25.1% retail REITs. RWR holds 18.4% apartments, 16.2%, regional malls, 12.4% healthcare, 10.8% office, 7.4% strip centers, 7.1% hotels and 3.9% mixed industrial/office space.

Additionally, investors would also be taking a broad view on economic growth with REITs investments. Some investment experts argue that since commercial property has a larger presence in the U.S. economy than REITs do in the equities market, investors could benefit from a 5% to 10% allocation to REITs to bring their investments more in line with commercial property’s significance in the overall economy.

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Vanguard REIT (VNQ) and Vanguard Ex-US REIT (VNQI) are components of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 6.01% (as of 5 July 2015).  

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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