A surge in renting homes and apartments has pushed up prices as builders fail to meet the rising demand. While Americans are forced to pay higher rents, investors may capitalize on the trend through a residential real estate investment trust-related exchange traded fund.
The iShares Residential Real Estate Capped ETF (NYSEArca: REZ) includes large positions in apartment REITs like AvalonBay Communities (NYSE: AVB) 8.5% and Equity Residential (NYSE: EQR) 10.2%. Residential REITs make up 46.2% of REZ’s underlying portfolio.
REZ has also been outperformed broader REITs. The residential REITs ETF gained 7.3% so far this year while the broader Vanguard REIT ETF (NYSEArca: VNQ) dipped 0.2%. Moreover, as a REITs investment, REZ has an attractive 3.26% 12-month yield.
Supporting the residential REITs space, renters in the U.S. have ballooned by 9 million over the past decade, the largest jump in renters on record, and they are paying more than ever, reports Diana Olick for CNBC.
According to the Harvard Joint Center for Housing Studies, 43 million families and individuals rent, and 1 in 5 are considered “cost-burdened,” or paying more than 30% of incomes on rent.
“The crisis in the number of renters paying excessive amounts of their income for housing continues, because the market has been unable to meet the need for housing that is within the financial reach of many families and individuals with lower incomes,” said Chris Herbert, managing director of the center.
Demand for rentals have outstripped supply despite a recent surge in apartment construction and a 35% increase in number of single-family rental homes since the housing bust. Currently, rental occupancy is at a 30-year high, with monthly rents at record highs and still rising at 3.5% annually.
“These market conditions will likely continue in 2016, as newly built apartments are absorbed by demand from new, young households. Look for rental vacancy rates to remain relatively low and rent growth to outpace inflation in 2016,” Frank Nothaft, chief economist of CoreLogic, said in a recent report.
Looking ahead, with interest rates set to rise, mortgage rates are also expected to rise, which could steer more people toward rentals. Moreover, as rent prices rise, renters may be less likely to save enough for a down payment on a new home. [REIT ETFs May Hold Their Own in Rising Rate Environment]
iShares Residential Real Estate Capped ETF
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.