The real estate sector is lagging behind the broader market, but the good news in that scenario is that some compelling discounts are currently available, including the FlexShares Global Quality Real Estate Index Fund (GQRE) is worth considering over the near-term.
GQRE targets the Northern Trust Global Quality Real Estate Index, a fundamentally-weighted index that focuses on commercial and residential REITs. Mortgage REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers, and real estate agents and home builders are among the securities excluded from the index.
“The real estate sector is currently trading at a significant discount,” said Morningstar analyst Kevin Brown in a recent note. “Our coverage currently trades at a 21% discount to our estimate of intrinsic value compared with our total coverage trading in line with our fair value estimates on average at the end of the third quarter. Currently, the real estate sector is 25% 5-star and 30% 4-star, with only 21% of the total sector trading in either 1- or 2-star range.”
Reasons to Embrace GQRE
Right now, real estate is undergoing somewhat of a shift due to the Covid-19 pandemic. With more companies settling into the work-from-home dynamic, less office real estate space is needed and more homeowners are increasing their home office space.
Fixed income investors know that yield is hard to come across these days—unless investors are willing to take on more risk by accepting more duration in safe haven government debt, opting for high yield, or looking at opportunities overseas—to name a few. On the other hand, GQRE offers an alternative to those prosaic income-generating assets.
Speaking of yields, real estate dividend yields are currently elevated, potentially making the asset class attractive to income-starved investors.
“To receive tax-free status, REITs are required to pay out most of their net income as dividends to shareholders. These companies are frequently included in portfolios of income-oriented investors. As a result of the recent equity sell-off, dividend yields have dramatically increased. We currently believe that most REITs will continue to pay their dividend, making these high yields very attractive to investors,” notes Brown.
For its part, GQRE yields 4.90%, or 100 basis points more than some widely followed REIT benchmarks.
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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.