REITs: Laggards, but for how long?

Rising rates and high expectations have hurt the real estate vehicle, but a few factors could brighten its outlook

Mar 29, 2017 @ 5:41 pm

By John Waggoner

In this market, looking for bargains is like looking for a good show on local cable at 2:00 in the morning. While commercial real estate isn't cheap, REITs offer decent yields — and the chance to buy something that hasn't participated in the latest bull move.

Even though the Standard & Poor's 500 stock index has gained 18.3% the past 12 months, the real estate sector has risen just 6.1%, according to Morningstar (MORN). Even in the rally this year, buoyed by the prospects of tax cuts and reduced government regulations, REITs have gained just 0.6%, versus 5.9% for the blue-chip index.

What gives? Traditional reasons for REIT underperformance, for a start. The 10-year Treasury note rose from 1.37% in July last year to 2.61% on March 13. Wall Street often sees REITs, like utility stocks, as bond proxies, and bond prices fall when interest rates rise.

The other problem was a happier one: "REITs have been on a tear the past couple years," said Gregg Fisher, manager of Gerstein Fisher Multi-Factor Global Real Estate Securities Fund (GFMRX). They needed a rest for results to equal expectations, he said. "If you have prices that expect greatness, even if they do great, they could do less than we expected them to be."

Mr. Fisher, whose fund is split roughly between global and U.S. REITs, thinks the global section of the portfolio might be better performing going forward. The U.S. economic recovery is long in the tooth, and rates are rising. In other areas of the world, such as Europe, the economic recovery is young and rates are still low.

The fund ranks third among global real estate funds the past three years and, as its name implies, is largely a quant fund. The two factors that make the most difference, according to Mr. Fisher:

Size. As with common stocks, small is often better. Smaller REITs tend to outperform — and to be less-followed by their larger brethren.

Leverage. REITs that use lots of borrowers often fare well in a rip-snorting bull market. But over a long cycle, leverage hurts on the downside, and makes it more difficult for REITs to borrow when prices are low.

"We tend to dial down risk with leverage and dial up risk with size," Mr. Fisher said.

As for prices, he looks to relative value.

"We look at things on a relative measure and let the market do the work," he said.

REITs have the advantage of yield — the typical REIT yields about 4.16%, according to NAREIT, the funds' trade group, compared to less than 1% for a money market fund and 2.39% for a 10-year Treasury note.

Much of the market's recent rally has been built on the premise that lower regulation and taxes will send the economy soaring — and President Trump is, after all, a real estate developer. Should those expectations pan out, then U.S. real estate funds might be the way to go. Otherwise, it might be wiser to spread your risks globally.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Where in the U.S. are RIAs growing the fastest?

InvestmentNews' deputy editor Robert Hordt talks to senior columnist Jeff Benjamin about his report on how registered investment advisers are faring in different regions of the country.

Latest news & opinion

3 big reasons to do a Roth conversion right now

The time is ripe for many to convert a pretax IRA to a Roth.

10 must-know facts about today's 401(k) plans

Here are the latest changes in 401(k) plans across areas such as investments, fees, contributions, investment advice and more.

Questions abound as Ohio National stops commission payments this week

Advisers are grappling with how to proceed, with their clients and their businesses, as the insurer's new annuity trail policy takes effect.

Top 10 RIAs in the South

These are the largest registered investment advisory firms in the Southern U.S., based on AUM.

Top 10 RIAs in the Midwest

These are the largest registered investment advisers in terms of AUM in the Midwestern U.S.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print