For investors, Real Estate Investment Trusts (REITs) have been one of the best-performing market sectors since the end of the Great Recession. While the housing market continues to struggle, investors in office buildings, apartments and shopping malls continue to put up strong total returns. Recently the FTSE NAREIT All REITs Index bested the S&P 500 for the fourth year in a row.
Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.
For investors, the current environment of a slow-growing economy and low interest rates could make REITs the asset class du jour once again in 2013.
Expectations are High
For portfolios with commercial real estate holdings, 2012 was another banner year. The FTSE NAREIT All REITs Index, which includes both equity and mortgage REITs such as Annaly Capital (NYSE:NLY), delivered an impressive 20.14% total return in 2012. Backing out the mortgage firms, the FTSE NAREIT All Equity REITs Index still managed to produce returns in excess of 19%. There are plenty of reasons to be excited in 2013 for REIT investors as well.
REITs continue to benefit from the low-interest-rate environment on two fronts. First, individual investors have been drawn to the sector's high dividend yields. Due to their tax structures, REITs are required to pay out nearly all of their taxable income to shareholders. That typically results in significant dividend yields for the stocks. The FTSE NAREIT All REITs Index yield on the last day of 2012 was 4.38%. More importantly, those dividends have continued to grow as the economy has improved.
Second, the low interest rates benefit REITs by allowing lower costs to access capital. REITs currently own only 10% of all the real estate in the country. They are, however, using those low-capital costs to grow via acquisitions and add to their portfolios. That has helped boost those juicy dividends even more over time.
Finally, REITs continue to benefit from overall improving conditions and market data. Occupancies still remain high, rents are growing and general consumer confidence remains strong. These factors may help drive commercial real estate firm share prices much higher in the upcoming year.
A Solid Bet
For investors, the combination of high dividends plus share price appreciation should make REITs a good place to deploy capital in 2013. A great place to start is the iShares Dow Jones US Real Estate (ARCA:IYR). This ETF is one of the most liquid options for investors and tracks 90 different real estate firms. Top holdings include mall operator Simon Property Group (NYSE:SPG) and apartment owner Equity Residential (NYSE:EQR). IYR fund has performed well since its inception back in 2000 and produced 10.31% in annual returns. The fund currently yields roughly 3.7%. Other solid broad choices include the SPDR Dow Jones REIT (ARCA:RWR) and Vanguard REIT Index ETF (ARCA:VNQ).
Health care-related real estate finished 2012 with a 20.35% gain. Much of that growth was due to the large increase in senior housing. The average occupancy rate for the senior housing sector has risen consistently over the last 10 quarters. That prompted many firms like Health Care REIT (NYSE:HCN) and Ventas (NYSE:VTR) to make acquisitions in the sector. Both firms make an ideal play on health care real estate and its growth.
With consumers beginning to open their wallets, the owners of shopping plazas, strip malls and free-standing retail locations have finally bounced back. Firms such as CBL & Associates (NYSE:CBL) and Realty Income (NYSE:O) have seen their share prices and dividends grow over the last year. Investors can expect more of the same in 2013. CBL and O shares yield around 4% and 4.3%, respectively.
The Bottom Line
The commercial real estate sector continues to outperform the broad stock market. 2013 should bring more of the same. Benefiting from low interest rates, the hunt for income and improving economic conditions, REITs could be the go-to investment this year. For investors, the previous picks, along with the broad iShares Cohen & Steers Realty Majors (ARCA:ICF) make ideal selections to play the sector.
At the time of writing, Aaron Levitt did not own shares in any company mentioned in this article.