After being completely obliterated during the financial crisis, commercial real estate rose sharply in the subsequent years as investors sought the sectors high dividends and values. Overall, real estate investment trusts (REITs) managed to provide investors with a 17.8% annualized return from 2010 through 2012. Those gains continued into the beginning of 2013. Then the Fed began its tapering talk. With the potential of rising interest rates on the table, investors have shunned high dividend paying sectors and shares of REITs have plunged in wake of the Fed’s news. Yet, given the commercial real estate sectors long term history of outperformance, investors looking for bargains may want to scoop up shares of operators of shopping plazas, office buildings and hospitals. SEE: The REIT WayBetter Valuations After reaching a six-year high set on May 21, 2013, REITs have plunged about 14.75% since the Federal Reserve provided an update regarding its plans for future bond purchases. However, investors may not want to cast off their commercial real estate holdings just yet in the face of the Fed’s taper talk. That’s because REITs continue to offer plenty of portfolio benefits- and time to buy hasn’t been better. First, the sell-off has made REITs pretty attractive from a valuation standpoint. According to real estate research firm Green Street- the average U.S. REIT is trading at a 10% premium to its net asset value (NAV). That’s more in line with the sectors long-term average. Just a few months ago, REITs were trading at a monster 29% premium to their NAVs. Additionally, REITs strong dividend yields have moved back towards historical averages and still yield a full percentage point higher than U.S. Treasuries. And those dividends are poised to grow even higher over the next three years. Analysts at Merrill Lynch estimate that the sectors weighted average three-year dividend compound annual growth rate (CAGR) will be a strong 7% based on the first-quarter 2013 annualized dividends. The investment bank’s research also showed that REITs could see the possibility of a 12.2% three-year dividend CAGR, if conditions are right. Either way, getting 7% more in dividends each year is certainly appealing- even with rising interest rates. Which shouldn’t matter that much to the REITs. Despite being the reason for their sell-off, commercial real estate has actually done quite well in the face of higher interest rates. Since 1994, there have been 12 periods when the 10-year treasury yield rose 75 basis points or more for a sustained period. REITs have performed wonderfully during this time and have risen 14% on average. That beats the broad S&P 500’s 7.7% returns during the same time period. Bargain Shopping For REITs Given the recent downturn in REIT share prices and the longer term potential, investors may want to add a dose of commercial real estate to their portfolios. The easiest way continues to be through the Vanguard REIT Index ETF (NYSE:VNQ). The ETF spreads its $36 billion in assets among 126 different REITs including stalwarts like mall owner Simon Property Group (NYSE:SPG) and apartment REIT Equity Residential (NYSE:EQR). The fund charges a rock-bottom expense ratio of just 0.10% and currently yields 3.37%. Likewise, the iShares Dow Jones US Real Estate (NYSE:IYR) can be used as proxy for the sector as well. SEE: The Basics Or REIT Taxation While REITs have performed well in the face of rising interest rates, these hikes can affect smaller, less well-capitalized firms. Given that fact, some investors may want to hire active managers to guide their portfolios. Run by Invesco’s (NYSE:IVZ) commercial real estate team, the PowerShares Active U.S. Real Estate (NYSE:PSR) uses quantitative and statistical metrics to identify attractively priced REITs and manage risk. So far, that’s paid off with the fund delivering 29% return since its inception in 2008. At the same time, both the closed-ended Neuberger Berman Real Estate Securities Income Fund (NYSE: NRO) and ING Clarion Global Real Estate Income Fund (NYSE:IGR) currently trade at discounts to their NAVs and offer monster dividends. The Bottom Line The Fed’s taper talk recent squashed some of the euphoria for the commercial real estate world. However, REITs have historically performed well during phases of rising rates. With prices for the sector now depressed, investors have the chance to load up on shares once again. The previous picks- along with funds like the SPDR Dow Jones REIT (NYSE:RWR) –make ideal picks.

Related Articles
  1. Retirement

    Using ETFs To Replace Your Expensive Mutual Funds

    Fees associated with many mutual funds looks small. Some are barely over 1% or even lower. But over time those fees erode the overall value of your portfolio. And even in the near term, as in ...
  2. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  4. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  6. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  7. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Gentrification

    Gentrification refers to when a neighborhood or city undergoes ...
  6. Home (legal definition)

    A home is the place where a person has their permanent primary ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!