Residential real estate investment trusts-related exchange traded funds could continue to outperform as rents rise at record rates and many Americans are forced to rent for longer in a pricey housing market environment.
Rental building owners have capitalized on strong apartment demand over the coronavirus pandemic. Looking ahead, household formations that were delayed during early lockdowns could contribute to a surge in new leases, and the priciest housing market in history will force many would-be buyers to keep renting, the Wall Street Journal reports.
Consequently, this confluence of events has helped support the outlook for apartment owners, with building occupancy rates at records of more than 97% for market-rate apartments, further enabling landlords to raise rents. Asking rents were nearly 20% higher for the 12-month period ending in November, according to Realtor.com.
However, Realtor.com also calculated that asking rents nationally will rise in 2022 by over 7%, or at a lower rate of growth than this year.
Analysts now anticipate that the favorable market environment will bolster landlord balance sheets in 2022. For instance, Green Street, a commercial real estate analytics provider, estimated record profit growth next year for publicly traded landlords, or a projected 13.5% rise in net operating income, which would outpace the office, retail, lodging, and student housing sectors.
“We see people staying put,” Thomas Grimes Jr., chief operating officer of Mid-America, said during an October earnings call, adding that the company, which specializes in middle-income buildings in Sunbelt markets, will be raising rents by 13% for its renewal tenants.
Investors who want a piece of the real estate action can access the space through funds like the Vanguard Real Estate ETF (NYSEArca: VNQ). VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index, which measures the performance of publicly traded equity REITs and other real estate-related investments. However, broad REITs sector-specific ETFs have low exposure to residential REITs, with VNQ’s underlying portfolio including a 15.1% tilt to residentials.
On the other hand, ETF investors who are interested in gaining exposure to this ongoing trend in the housing market can consider residential-heavy REIT ETFs, such as the iShares Residential Real Estate Capped ETF (NYSEArca: REZ) and the NuShares Short-Term REIT ETF (BATS: NURE). NURE includes a hefty 50.6% tilt toward apartment- or rental-related REITs, while REZ has a 50.6% weight in residential REITs.
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