While U.S. markets retreated in the wake of the recent China-induced selling, residential real estate investment trusts and sector-related exchange traded fund have held up surprisingly well.
The iShares Residential Real Estate Capped ETF (NYSEArca: REZ) dipped 0.9% year-to-date while the S&P 500 Index declined 5.8%.
The rising number of U.S. renters and shift away from home ownership has helped support the residential REITs space. REZ includes a hefty 47.4% tilt toward residential REITs, along with 31.5% health care REITs and 20.8% specialized REITs, which includes storage units.
REZ includes some prominent residential REITs, including AvalonBay Communities (NYSE: AVB) at 8.2% of the fund’s portfolio and Equity Residential (NYSE: EQR) at 9.5%. The ETF’s largest component is Public Storage REITs (NYSE: PSA), a specialty REIT, at 12.0%.
The residential REITs market has been enjoying rising demand, with average rents nationwide up 4.6% in 2015, the largest gain since before the recession, reports Laura Kusisto for the Wall Street Journal.
Rents have increased by over 20% since the start of 2010, and most economist expect 2016 to be another strong year.
The influx in rental demand has also pushed developers to build almost 1 million apartments in the U.S. over the next three years, compared to the nearly 900,000 constructed in the previous three years.
“I sound to myself like a broken record because I’ve been saying the same thing for quite a few years now,” Mark Obrinsky, chief economist at the National Multifamily Housing Council, told the WSJ. “Demand remains high for apartments.”
Despite rising rental prices and diminishing supply of affordable apartment space, Americans are not buying new homes, which may continue to support residential REITs.
“Most people forming households today are not buying,” Michael DeMarco, president of Mack-Cali, told the WSJ.
ETF investors can also track the broader REITs space with options like the Vanguard REIT ETF (NYSEArca: VNQ), which includes a 16.9% tilt toward residential REITs. VNQ is down 2.3% year-to-date.
iShares Residential Real Estate Capped ETF
Max Chen contributed to this article.