REIT Stocks Rise Again On Calm Rates, Higher Visibility
Great article from Investors Business Daily on how REITs are bouncing back. While we are not a REIT, Prudent Growth certainly shares many of their fundamentals, so this was an interesting read.
We were particularly interesed in the analysis of the impact of the upcoming Global Industry Classification Standard - which will break out real estate into a completely new category of investment. This is going to be a big deal and should increase the amount of money being allocated by large investors into real estate.
From the article:
The Federal Reserve’s indication in its policy statement this week that fewer rate hikes were likely this year gave another jolt to REIT shares across the board, from apartment and hotel sectors to industrial properties and shopping malls.
Investors tend to shy away from REITs in rising-rate environments because of concern of higher borrowing rates to fund real estate transactions. Since REITs return at least 90% of their taxable income to shareholders in the form of dividends, operators don’t have much excess cash on hand for such purposes.
But the Fed statement alone is not the only reason REIT stocks are back in favor, real estate experts say. They cite renewed merger and acquisition activity and increased visibility due to the upcoming breakout of real estate into a separate global industry classification. Plus, federal legislation enacted late last year that reduces taxes on the sale of U.S. real estate by foreign investors may also positively impact REIT stocks.
Investors are also following the money. Fund managers and others have started moving more money into REITs ahead of the creation of a new real estate category under the Global Industry Classification Standard, or GICS, which goes into effect after the market close on Aug. 31.
“It’s getting closer,” Grupe said of the deadline. “It’s another positive change (for REITs).”
Real estate experts estimate that as much as $100 billion of new investment dollars will flow into real estate securities, mostly REITs, as a result of the new real estate sector, though some estimates are far lower.
It will be the first new sector class since GICS was formed in 1999 by Standard & Poor’s and MSCI Barra. Real estate is currently sheltered within the broader “financials” category.