by Ethan Roberts | November 8, 2013 6:00 am
Have you ever wanted to invest in real estate, but hate the thought of complaint calls about leaky faucets, or having to evict non-paying tenants the week before Christmas? Well, an easier way to invest in real estate is through real estate investment trust (REIT) stocks, or more specifically through a REIT ETF.
One such REIT ETF is the iShares Residential Real Estate Capped ETF (REZ).
Individual real estate investment stocks, along with this REIT ETF, performed very well from 2008 to 2012. That’s because a massive numbers of foreclosures forced homeowners to flee into apartment rentals. And for several years, these consumers were forced to continue renting because they were unable to qualify for another mortgage.
After several difficult years, residential real estate sales have flourished for most of 2013 in an atmosphere of inexpensive prices, low interest rates and high investor demand. But this has not been good news for real estate invesment trust stocks, and thus for the REIT ETF.
Improving home sales market led to a slowing in the apartment market, and this was reflected in an underperformance of some of the real estate investment trust stocks that invest in apartment complexes. REIT stocks such as Equity Residential Property Trust (EQR) and Post Properties (PPS) severely underperformed the general market this year.
It should be no surprise, then, that the REZ REIT ETF and others were also hurt. But they have been hurt to a lesser degree because of their ability to diversify. Although largely invested in apartment REITs, REZ has diversification through its portfolio of healthcare real estate and self-storage stocks. Its largest current holding is Public Storage (PSA), a self-storage real estate investment stock which has nearly doubled since December 2011.
This REIT ETF and others also benefited greatly from the low interest rate environment created by the Federal Reserve in recent years. However, talk of the Fed scaling back its monthly $85 billion bond purchases has now hurt real estate investment trust stocks in 2013.
But looking at the financials for REZ, the REIT ETF has a current dividend yield of 3.42% and has paid out steady dividend increases since its inception in 2007. Plus, the REIT ETF boasts a total annualized market return over the past five years as follows:
Yes, the recent performance of this REIT ETF has been tepid compared to its outstanding performance in the 2008-2012 period. The bundle of real estate investment fund stocks had a 40% return in 2011 alone. And while the REIT ETF is up around 5% in the last year, that is well below the whopping 27% return of the S&P 500.
Despite this, I am quite bullish on this REIT ETF for 2014 and anticipate a steady turnaround over the coming year. I believe that residential home sales could slow dramatically in 2014, which would mean increased demand for apartment rentals. That would be good news for real estate investment trust stocks focused in that sector.
After a gangbuster spring and summer, the residential housing market is already showing signs of a slowdown — probably a combination of rising prices and interest rates, fewer full-time jobs being created and the government shutdown.
Going forward into 2014, two more factors could provide headwinds for real estate sales and thus tailwinds for real estate investment trust stocks and this REIT ETF.
For one, increased insurance or medical deduction costs from Obamacare will make it more difficult for the first-time homebuyer demographic to save for down payments or pay for closing costs and other necessary expenses involved in buying a home. It could also lead to more young workers having their hours cut or simply finding it more difficult to secure better employment.
Anything that slows down sales will have the opposite effect upon the rental market, and a REIT ETF like REZ will surely benefit from that.
On top of that, new rules from the Consumer Financial Protection Bureau threaten to make qualifying for mortgages more difficult and to put more pressure on lenders. This would absolutely devastate the first-time homebuyer market, and by contrast will keep that demographic group renting for longer periods of time. Again, this will become a boon for the REIT ETF.
Should home sales falter, it becomes the perfect set-up for the apartment industry to regain the steam it had in 2011 … and for this group of real estate investment trust stocks to follow suit.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.
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