REIT funds are having an outstanding year but the real estate sector just became a more compelling consideration for buying new shares or adding a new REITs position to your portfolio now.
Just this week, the National Association of Realtors announced a significant decline in first-time home buyers. The NAR survey reported that the share of first-time buyers fell to “its lowest point in nearly three decades.”
Now, if we dig just a bit below the headline, we turn our attention to the bread and butter of Real Estate Investment Trust (REIT) revenue growth — the capacity for increasing rents. And what enables real estate companies to increase rents? Higher occupancy rates, which are fueled by the demand for rents. But the decline in first-time home buyers is just another layer to the higher demand for rents. Tighter credit at banks and home prices rising faster than wages both outweigh the historically low interest rates.
Of course, this environment doesn’t automatically point to buying REIT funds now but these numbers may at least extend the 2014 price gains for the sector in the near term. Also, if you are looking for decent yields in this near-zero bond yield environment, REIT funds can play that role as well.
Here are some top REIT funds to consider buying now.
Top REIT Funds to Buy Now: iShares Cohen & Steers REIT (ICF)
If you want a pure U.S. REIT fund, iShares Cohen & Steers REIT (ICF) is a good place to begin, and possibly end, your search. Unlike other REIT funds that venture beyond the United States or even into derivatives for extra performance potential, which also adds extra market risk, iShares Cohen & Steers is an ETF that invests completely in long positions of large-cap U.S. REIT companies.
The trailing 12-month yield is not gigantic at 3.18% but if you need or want decent yields in combination with short-term growth potential and a long-term diversification tool, ICF might be your best choice.
The low 0.35% expense ratio is also another edge that only an index fund can give shareholders.
Top REIT Funds to Buy Now: T. Rowe Price Real Estate (TRREX)
If you’re looking for a well-managed mutual fund that’s grounded in fundamentals and oriented to the long term, T. Rowe Price Real Estate (TRREX) is an outstanding choice.
At the helm since 1997 (17 years!), David Lee looks for compelling REITs and real estate operating companies with strong long-term growth prospects and reasonable valuations. The 15-year annualized return of 12.0%, which ranks ahead of 85% of real estate funds, is sufficient evidence of Mr. Lee’s long-term strength.The fund also looks outstanding year-to-date with a 26% gain.
The average market cap and style for the portfolio holdings makes TRREX a solid mid-cap value fund and the low expense ratio of 0.79% is a great deal for a sector fund and seasoned manager.
If you’re looking for yield TRREX’s is a decent 2.07%, and the minimum initial purchase is $2,500.
Top REIT Funds to Buy Now: PIMCO Real Return Strategy D (PETDX)
If you don’t mind taking higher risk for the potential for capturing higher returns, you might consider PIMCO Real Return Strategy (PETDX).
The 3-year standard deviation of 18.9% (compared to 10.5% for the SPDR S&P 500 Index (SPY)) makes for some wild swings in price. The fund is a heavy user of real estate-linked derivatives (futures, options, swaps) backed by Treasury Inflation-Protected Securities (TIPS).
Year-to-date PETDX is up 35%, which places it ahead of 99% of real estate category peers, but the 2013 return 0f -13% puts down below 99% of the category. However, the 10-year return of 10.8% that beats 98% of real estate funds may justify the wild ride in the short-term periods.
The TTM yield is 5.71% but the expenses are a bit pricey at 1.14%.
You can get into PETDX with an initial purchase of $1,000.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.