The real estate sector is historically vulnerable to the rising interest, which goes a long way toward explaining the group’s slack start to 2022.
However, some broad-based real estate benchmarks are slightly outperforming the S&P 500, and with investors still needing income due to low yields on government, there’s something to be said for looking for value among the related exchange traded funds. That group includes the Avantis Real Estate ETF (AVRE).
AVRE, which debuted last September, attempts to beat the S&P Global REIT Index. Many novices don’t realize this, but the real estate sector is expansive, and the various industries within the sector don’t always perform in lockstep with one another. That phenomenon was on display during the worst days of the coronavirus pandemic when hotel real estate investment trusts (REITs) slipped. Today, however, some analysts are bullish on healthcare and hotel REITs.
“While the vaccine allows travelers to return to hotels and keeps residents of senior housing facilities safe, travel restrictions and quarantines that may arise from the variants could cause a significant drop in occupancy for both subsectors,” says Morningstar analyst Kevin Brown. “Despite short-term disruption, we continue to believe that both the hotel and healthcare subsectors will see years of strong growth ahead of them.”
Making Up The Roster
Healthcare and hotel REITs combine for about 8% of AVRE’s roster. While the pandemic was initially a drag on travel-related REITs, other groups in the sector thrived and still offer considerable upside potential for long-term investors. These include industrial and self-storage REITs.
“While both fell in the first few months of the pandemic, they returned to pre-pandemic levels by the summer of 2020. Then, as real estate fundamentals improved through 2021, they produced significant returns for investors,” adds Brown.
Industrial REITs are AVRE’s second-largest industry allocation at just north of 20%. That positions the fund to capitalize on expanding the real estate needs of e-commerce companies.
Among the individual AVRE components, Brown is bullish on is senior care REIT Ventas (NYSE:VTR), which also owns other medical real estate.
“While the company’s medical office and life science portfolios should be relatively unaffected by the coronavirus outbreak, the senior housing portfolio has experienced a very significant impact to occupancies, as the virus has the highest lethality rate among senior citizens. However, while the virus continued to hurt net operating income in 2021, the industry should see strong long-term growth from the coming demographic wave of baby boomers aging into senior housing facilities,” concludes the Morningstar analyst.
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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.
