Real estate stocks are now the second-best performers in the S&P 500 index year-to-date (YTD), lagging only the red-hot technology stocks. The sector has become an increasingly popular way for investors to bet on the rapid expansion of online shopping, while benefiting as steady income plays in an environment of lower interest rates, as outlined in a detailed Wall Street Journal report.
Prologis Inc. (PLD) and Duke Realty Corp. (DRE), for example, are both trading at their highest levels in roughly a decade. Prologis has seen its stock gain a whopping 37% YTD, while Duke Realty’s stock has returned 23.8%, compared to the broader S&P 500’s 16.4% increase this year. These industrial real-estate investment trusts (REIT) own and operate warehouses.
Warehouses Owners Best Bet on E-Commerce
Bullish investors and analysts say that they view these real estate stocks as a way to piggyback on the growth of e-commerce. While the sector includes companies that own property like malls, senior housing and apartment buildings, the companies that are outperforming the group do business with mega online retailers. Investors are now looking to buy shares of the companies that own the warehouses which are increasingly viewed as the lifeblood of online giants such as Amazon.com Inc. (AMZN), JD.com and others, as well as popular brands such as Home Depot Inc. (HD) and Wayfair Inc. (W).
Blackstone Group has endorsed this e-commerce investment strategy by purchasing a network of U.S. industrial warehouses used by Amazon and other e-tailers in the largest private real-estate transaction to date, as outlined in another Wall Street Journal report. The private equity giant bought the property from Singapore-based GLP last month, as its $18.7 billion offer outbid real estate rival Prologis for a portfolio accounting for roughly 180 million square feet of property.
Private Equity Giant Strategizes for E-Commerce Boom
Blackstone’s latest acquisition includes 1,300 properties in the U.S., with the majority of them near population centers. GLP’s biggest tenants include Amazon and other retailers that rely on industrial warehouses near big cities to solve the problem of “the last mile” for their next-day delivery promises.
Nadeem Meghji, the head of Blackstone’s real estate investing activities, told the Journal that GLP will fit within the company’s focus on “large scale, high conviction, thematic investing.” Blackstone now own about 750 million square feet of U.S. logistics properties, adding to its already $140 billion of assets such as thousands of single-family homes, and key properties like Chicago’s Willis Tower and the Cosmopolitan of Las Vegas resort and casino.
Blackstone has indicated that it will divide up the new assets, about half of which it had previously owned and sold, per the Journal. Approximately two-thirds is set to go into its opportunistic real estate strategy, with the remainder put into its private real estate investment trust, which is open to retail investors and has longer-term leases.
Low Rates Positive for Real Estate Plays
Another force that will keep these real estate stocks rising is these companies’ steady payments in a low-rate environment, some analysts say. The real estate sector has long been favored by income investors, who now view the industry as even more attractive now that the Fed has backed away from its hawkish policy.
In 2018, due to the central bank’s decision to increase rates, as well as fear of more rate hikes, the real estate segment fell 5.6%. Now, however, that trend is reversing, as a majority of investors expect the Fed to cut rates in light of decelerating global economic growth. This expectation has pushed down the 10-year Treasury yield to a 21-month low, and has driven the S&P 500 real estate sector to an all time high
This coming week will bring about the highly anticipated June Federal Open Market Committee meeting. While the markets are not pricing in a rate reduction for Tuesday, the market is expected a cut in July, and any failure to do so could represent a major headwind for U.S. equities.