Real estate investment trusts (REITs) and the related exchange traded funds are notoriously rate-sensitive asset classes. As such, it’s not surprising that REIT ETFs are struggling in 2022 amid six interest rate hikes by the Federal Reserve.
However, some market observers believe better things are in store for REITs in 2023, but with selectivity being the name of the game, investors may want to consider actively managed strategies. Enter the Goldman Sachs Future Real Estate and Infrastructure Equity ETF (GREI).
“We do see a bull case for quality REITs with BofA Investment Strategy recommending long bonds in 1H23 & long stocks 2H23,” wrote Bank of America analyst Jeffrey Spector in a recent client note. “In our view, high quality REITs offer a good blend given they are stocks with bond-like features.”
GREI is relevant in this conversation because, as Spector points out, high-quality REITs in specific sub-segments could make the difference next year. That forecast is pertinent because an actively managed strategy can adapt more rapidly than a passive rival and there are no guarantees that index-based real estate ETFs will be adequately allocated to those pockets of strength.
“Key quality REIT characteristics are; resilient pricing in face of a recession; multi-year earnings visibility based on secular growth drivers; strong, flexible balance sheets; visible and above-average distribution growth; and highest prospect for global inflows resulting in relatively steadier asset values and steadier cap rates despite higher rates,” according to Seeking Alpha.
Among the real estate sub-groups that Bank of America is constructive on for 2023 are industrial, manufactured housing, self-storage, and senior housing. GREI, which also offers investors the benefits of income-enhancing infrastructure investments, has some exposure to those groups.
In fact, Spector mentioned Prologis (NYSE:PLD), the industrial REIT with the biggest portfolio and GREI’s top holding at a weight of 5.7%, as the preferred idea in that segment.
“We expect PLD will continue to generate sector leading SS NOI growth of +8% as it maintains strong pricing power given low availability and its markets screen with stronger rent growth prospects versus peers,” wrote the Bank of America analyst.
The ETF also features exposure to shares of Welltower (WELL), which is one of the dominant providers of senior housing and another stock highlighted by Bank of America.
“WELL has the highest exposure to senior housing operating assets within our coverage universe and based on our demographic analysis has the best positioned portfolio. Longer term, demographic trends are favorable as baby boomers continue to age,” concluded Spector.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
