For a time, investors were wary of investing in REITs as rising interest rates and decelerating economic growth threatened to weaken the industry. But the securities that provide returns that are diversified away from markets are poised to exceed expectations, particularly in the U.S.
The U.S. Federal Reserve’s decision to cut interest rates is a tailwind for REITs, which “typically do better in low-interest-rate environments,” noted The Wall Street Journal. The space’s performance is also expected to be propped up by demand for specialized types of properties.
John Creswell, executive managing director at Duff & Phelps Investment Management Co., told the Journal that improvements in REITs’ corporate governance and a shift away from leverage has reduced their general sensitivity to the economy.
They are also refocusing their property portfolios on opportunities that can weather economic ups and downs. These include data centres and cell towers, which support the technology industry and are less beholden to the fortunes of individuals than some other types of real estate. Burl East, CEO of American Asset Capital Advisers, said that data centres have helped his firm’s Altegris/AACA Opportunistic Real Estate fund (RAAIX) achieve a 28.9% return through the second quarter of the year.
Real-estate companies have also taken the opportunity to improve their financials. Todd Kellenberger, analyst and portfolio specialist for real-estate securities at Principal Global Investors, cited a trend of companies refinancing their debt at lower rates thanks to the low-interest-rate environment. An overall reduction in debt, coupled with an increased use of built-up cash rather than leverage for investments, has also helped.
“[W]e’re seeing what we would hope to see, which are well-capitalized businesses that aren’t making big speculative bets,” Kellenberger said. He noted that it puts firms in good position to weather a slowdown and deflates obvious risks of real-estate bubbles, limiting the volatility one might expect from a correction in real-estate markets.
Another long-term positive for REITs cited by Steve Shigekawa, portfolio manager for the Neuberger Berman Real Estate fund (NREAX), is the trend toward renting homes and apartments rather than buying. Such assets, which derive profits from rental income, are becoming more of a focus for builders. Builders, for their part, are benefiting from “robust” lending and changes in zoning laws to allow the construction of more rental properties.
But not all rental properties are built equal. Rick Gable, portfolio manager for the MFS Global Real Estate fund (MGLAX), encourages REIT investors to look closely at a particular REIT’s ability or willingness to adapt to renters’ changing expectations.
“Commercial and residential tenants want to see investment in the building, they want the amenities, and they want it to be sustainable,” he told the Journal. “Management companies that are doing those things in a real way are going to be the future.”
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