In a year of volatility, yield-generating real estate stocks and sector-related ETFs outpaced the broader U.S. markets for the first time since 2015 as investors looked to dividends in an attempt to cushion the fall off in equities.
For example, year-to-date, the Pacer Benchmark Retail Real Estate SCTR ETF (NYSEArca: RTL) increased 7.9%, U.S. Diversified Real Estate ETF (NYSE Arca: PPTY) advanced 7.7%, iShares Residential Real Estate Capped ETF (NYSEArca: REZ) gained 6.1% and NuShares Short-Term REIT ETF (BATS: NURE) rose 3.1%. In comparison, the S&P 500 fell 3.0% this year.
Analysts anticipate real estate stocks to turn out another solid year ahead as volatility lingers in the broader market. J.P. Morgan Chase projects REITs will provide dividend yields of 4% next year, which could appeal to investors when the broader market indices are under pressure, the Wall Street Journal reports.
Morgan Stanley expects income growth for real-estate owners to rise again after years of declines, forecasting net operating income among REITs to gain 3% in 2019, compared to 2.8% expected for 2018.
Housing Demand Outlook
The inadequate supply and higher household formation from aging millennials could support housing demand while e-commerce growth could add to demand for warehouses. Something like the targeted Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEArca: INDS), which returned 2.7% year-to-date, offers investors exposure to US companies that generate the majority of their revenue from industrial REITs that are part of the e-commerce distribution and logistics network.
While rising interest rates diminish the advantage of REIT dividend payouts, shares of property owners strengthened in the past two months. Some traders pointed out that U.S. government bonds are close to yield-curve inversion – a phenomenon where shorter-dated bonds yield more than later-dated debt, which typically preceded recessions, and trade tensions between the U.S. and China continued to weigh on global growth. These types of conditions would typically support defensive plays like REITs.
“If you’re worried about the economy, demand for cold storage is as defensive as it gets,” Rick Romano, head of PGIM’s global real-estate securities, told the WSJ.
For more information on real estate investment trusts, visit our REITs category.