Residential REITs ETFs Could Be an Attractive Yield-Generating Opportunity

As housing rental prices continue to gain, income-minded investors should consider real estate investment trusts and related exchange traded funds with a focus on the residential segment.

According to Real Page data, national asking rents rose 10.3% in August year-over-year, the first double-digit increase in the over two decades this data has been collected, the Wall Street Journal reports.

In several popular cities, the asking rent hikes were much greater than the national figure.

“The rent growth that we’re seeing in places like Phoenix and Las Vegas and Tampa, it’s obviously unprecedented,” Jay Parsons, deputy chief economist for Real Page, told the WSJ.

August rents jumped more than 20% year-over-year in each of the cities mentioned by Parsons.

Monthly rents were also up over 20% in smaller markets like Boise, Idaho, and Naples, Florida, as well.

Analysts attribute the fast-rising rents to a number of factors. For example, many younger adults who sheltered from the coronavirus pandemic with family last year are now moving out to their own apartments. In many cases, they are prepping to go back to the office.

Meanwhile, middle-income workers who have been priced out of the hot housing market have been forced to go back to renting.

Along with the heavy demand, the limited growth in new apartment supply has contributed to rising prices. Apartment occupancy rates, a metric for helping landlords determine rent, reached a record high of 97.1% in August.

Americans are also more well-off, so they are willing to pay the higher rents. Household incomes for new renters at professionally managed properties also hit a new high of over $70,000 per year.

Looking ahead, the end to the federal eviction ban could also further support landlords’ bargaining power.

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 that 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 14.9% 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 NuShares Short-Term REIT ETF (BATS: NURE). NURE includes a hefty 49.7% tilt toward apartment- or rental-related REITs while REZ has a 50.5% weight in residential REITs.

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