(Reuters) – The once-sleepy U.S. real estate sector could be poised to continue its revival into the second half of 2019 but investors are selective in their bets on property companies.
While residential and industrial Real Estate Investment Trusts (REITs) are the most popular bets, office REITs look less attractive and retail is out of favor.
S - P - Real - Estate - Index
The dividend-rich, slow-growth S&P 500 Real Estate index has risen 18.5% so far in 2019, beating the S&P 500’s 16.99% gain. Unless the tide turns, real estate is on track for its biggest annual advance since 2014.
At several points this year and as recently as June 5, the real estate’s index’s year-to-date gains outpaced even the high-flying tech sector .
Sector - Investors - REITs - US - Earnings
Sector investors are optimistic that REITs can advance more as long as broader U.S. earnings growth stays weak and interest rates stay low.
“If the Fed policy is benign and you don’t see an acceleration of earnings, (REIT) dividend yields and a steady cash flow are pretty attractive to investors,” said Bob Zenouzi, Macquarie Investment’s chief investment officer for real estate.
Dividend - Yields - % - Cash - Flow
He sees REIT dividend yields of 4.5% and cash flow growth of 4-5% bringing a high-single digit to low-double digit percentage return rate for REIT investors in the next 12 to 18 months.
Also citing solid REIT earnings expectations and high dividends, Gina Szymanski, portfolio manager, at AEW Capital Management, is looking for REIT returns in the high single-digit range in the next 12 months.
Sector - Price - Asset - Book - Value
However, the sector’s price to net asset book value multiple is 3.8, higher than its historical average of less than 2.5 and the broader S&P’s ratio of 3.2, according to data from Datastream by Refinitiv.
The rapid gain, driven by low U.S. interest rates and concerns about U.S.-China trade relations as well as economic growth, has given some investors pause and the sector has underperformed in...
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