REITS Make an Attractive Investment
Great piece on the REIT.com website on the attractiveness of REITs for investors seeking returns in the current market.
Their points are all valid :
As the global population ages, the investing world’s appreciation for dependable income streams to fund retirement continues to grow. At the same time, economic uncertainty and global financial concerns are weighing on the stock market, making dividend-paying equities more appealing. Against that backdrop, REITs’ history of performance indicates they are sitting in a sweet spot for investors searching for hard-to-find, stable yields.
“It’s not surprising that REITs, which generally pay a healthy dividend, should be considered as part of any allocation strategy,” says Jason Yablon, global portfolio manager at Cohen & Steers. “You are potentially getting good current income with good inflation upside protection.”
Currently, demand and supply fundamentals among REITs make a good case for investing in the stocks.
The job market remains strong, and growth in gross domestic product remains adequate, expected to grow 2 percent in 2016, according to Green Street. Low supply growth in most real estate sectors will help maintain growth of net operating income at about 4.1 percent among the group of apartment, mall, industrial, office and strip-center REITs, according to Green Street. Also, REIT stock valuations traded in February at an 11 percent discount to the private-market value of their real estate assets, offering a value play as long as property prices hold or rise.
Fund managers and market watchers see a variety of potential sources of dividend income within the REIT market.
James Morrow, who manages the Fidelity Equity-Income Fund (FEQIX), currently likes the health care REIT sector. Focused on value, he also looks for REITs generally outside of tier-one cities. And despite higher valuations in the storage space, Morrow sees long-term value and appreciation potential there.
Sectors such as self-storage, manufactured housing, and apartment REITs have lower dividends, paying in the 2 percent to 3 percent range. Yet, these sectors offer strong fundamentals and seem most likely to have their dividends rise the fastest, adds Michael Knott, director of U.S. REIT Research at Green Street Advisors. “They all have a solid combination of expected cash flow growth and healthy coverage of existing dividends,” he says.
Yablon of Cohen & Steers also looks for value in stocks with good fundamentals and decent yields. Retail power-center REITs offer opportunities, as does the data center space, in part due to growth trends such as outsourcing of storage and cloud computing. “We think there [are] some secular growth drivers there,” Yablon says.
While this is all appealing, we think that the argument for private real estate investments - such as those Prudent Growth arranges - is even stronger. Rather than returns in the 3 to 5% range, we routinely produce returns north of 8% to investors. Unless there is a genuine need for short term liquidity, it does not make sense to sacrifice that much in the way of returns just for the liquidity.