There are a lot of reasons to invest in US real estate right now. A housing shortage? It is a good one. Low interest rates? It is there too. Need more data storage and a solution to the global supply chain disaster? I bet you didn’t see it coming.
Exchange traded real estate funds accumulate liquidity. The $ 6.2 billion iShares US Real Estate ETF, or IYR, recorded $ 1.3 billion in entries last week, making it the second biggest winner among ETFs after BlackRock giant S&P 500 SPY and marking its biggest weekly gain of all time. Not to be outdone, the $ 41.4 billion Vanguard Real Estate ETF, ticker VNQ was also in the rankings with $ 338 million. The fund has been hot for a while, as it recorded $ 1.2 billion in fundraising in May, its best month since March 2019.
Real estate stocks have been booming since the start of 2021, with the S&P 500 real estate index returning 23%, compared to a 12% increase for the broader index. The gains were led by investors in retail and residential businesses betting on increased economic activity as the pandemic recedes. This partly explains the offer for IYR and VNQ, both of which have nearly 40% weightings in specialty REITs with stakes in entertainment properties like casinos and movie theaters. In other words, investors see it as a bet on a “return to normal” environment.
However, the funds have very little exposure to commercial and hotel real estate, which are big chunks of the “reopening business”. On the contrary, 27% of BlackRock’s IYR and 21% of Vanguard’s VNQ are in four stocks: American Tower Corp., Prologis Inc., Crown Castle International Corp. and Equinix Inc. The companies specialize in data storage, wireless infrastructure and warehouses. Exposure to these stocks would suggest investors are betting on storage and supply chain issues.
“It appears that investors are using real estate ETFs as a way to capitalize on global logistics issues,” said Athanasios Psarofagis, analyst at Bloomberg Intelligence ETF, who also Noted that industrial and storage REITs have resisted better than hotels.
Even the $ 1.2 billion Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF, or SRVR, which has storage facilities for computer servers and the like, is up 11% since mid-May. Last week, data center REITs beat the others with a total return of 4.6%, strongly outperforming the Bloomberg US REITs Index.
“Flows follow performance and REITs have outperformed the broad market by 500-600 basis points,” said BTIG analyst James Sullivan. “It’s a factor.”
As pent-up demand begins to unleash from housing to commodities, housing supply remains relatively weak. Add to rising costs of building materials and a labor bottleneck, as well as strong demand for goods – both commercial and residential – are unlikely to be met. Similar to the situation in semiconductors, where a global shortage has driven up chip inventories, REITs will likely be seen as more valuable, especially as the economy gets back to work.
“The sharp increases you’ve seen in single-family home prices are unprecedented during a recession and provide great wiggle room for apartment REITs,” Sullivan added.
Investors’ relentless search for returns is also likely playing a role, as many turned to utilities, consumer staples and real estate stocks, sectors known for their performance, last week as the long end of the Treasury curve was decreasing.
“We see the interest rates surprising a bit. The 10-year yield remains in a 1.55% to 1.75% trading range, but it gradually declines, which is generally good for REITs, ”Sullivan said. “It would make sense for real estate or durable assets to provide some hedging protection for the entire market in the event of rising inflation.”
“From a yield perspective, there is still enough cushion on the 10-year yield to make it attractive,” added Psarofagis. “However, if yields increase, this sector could be affected.”