REITs keep getting spanked, but here are some bright spots

  • Written by MarketWatch
  • Published in Economics

The advantage of exposure to real estate[1] as a more concrete option among financial assets has been hard to glean from the dismal performance of real estate investment trusts over the past few years.

But some investors say there are bright spots emerging among REITs.

“It’s still a pretty good time to buy some REITs,” said David Copp, manager of the TIAA-CREF Real Estate Securities Fund TCREX, +0.41%[2]  . “We’re not where we were 10 years ago. We’re now at a point in the cycle where investors need to be much more selective.”

First, a reminder of why investors have shied away, taking REIT investments, including the SPDR Real Estate Select Sector ETF XLRE, +0.48%[3]  , down more than 5% for the year to date.

REITs didn’t benefit from the Trump administration tax cuts as much as other industries did. Most REITs generally don’t owe taxes because they pass on most of their earnings to investors. It’s also quite late in the economic cycle, but more critically, in the real estate cycle. That means occupancy rates are already high and rental rate growth is starting to slow.

Read: Here’s what tax reform, so far, has meant for the stock market and the economy[4]

But the more worrisome macro trend is rising interest rates. Many investors choose REITs as income-producing assets. That means their value will erode as inflation and rates rise. And others worry that rising rates make property acquisition and ownership more expensive for REITs, which could throttle their growth.

“It’s true that rising interest rates are a headwind,” Michael Gorman, a BTIG analyst, told MarketWatch. But other than in specific “rate shock” situations, like the 2013 “taper tantrum,”[5] when then-Fed chair Ben Bernanke spooked markets and sparked a bond selloff, “you do see the ability for REITS to keep up and perform,” he said.

Read: Mortgage rates march to fresh 7-year high[6]

Notably, industry group Nareit[7] says higher rates are just not a big issue, at least not now: REIT leverage is at the lowest levels ever recorded, the group says, and about 81% of outstanding debt held by the trusts is fixed rate, with a weighted average term to maturity of 6.3 years.

Gorman and Copp offered some ideas on which select REIT categories make good buys at this point.

Health care: BTIG prefers medical office REITs. As Gorman puts it, “There’s a ton of institutional demand. It benefits from all the macro trends, it...

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