Economy
(New York)
How does a REIT with great long-term business fundamentals and eye-popping yields sound? If that sounds good, take a look at Ventas. The REIT owns 1,200 properties, many focused on senior and assisted-living facilities. The long-term business looks very healthy as demographics—including retiring Baby Boomers—are a major growth opportunity for the REIT. The dividend yield is a strong 5.7%, and it appears safe, according to Morningstar.
FINSUM: Definitely seems like a REIT worth some more investigation. We like the combination of good yield and strong long-term fundamentals.
(New York)
The US economy is on fire. Growth is strong, consumer confidence is high, and (somewhat worryingly) the Fed is almost giddy. However, even the greatest optimists will have a gnawing fear caused by the US housing market, which has been in decline for the past handful of months. The huge rising gap between home prices and wages has finally stalled the market, all while rates move higher and dampen demand. The big risk that no one is pointing out, though, is how that trouble in housing will flow through to the broader economy. It will likely not be via mass mortgage defaults and foreclosures like last time, but rather through a severe tightening of purse strings. The big rise in home prices means Americans disproportionately hold their wealth in home values, so a decline will cause a major loss of wealth, and thus spending, seizing up the economy.
FINSUM: In 1978 a 20% decline in home prices would have caused a 1% decline in aggregate income. Today, the same decline would cause a five percent drop, or about $600 bn of lost equity. Housing may still lead the economy downward.
(New York)
Investors need to be careful, real estate looks likely to take a pounding in the coming months. While all the focus on the big jump in yields has been on how it has impacted bonds and stocks, one of the big risk areas is real estate. Unlike other parts of the economy and markets, real estate has been teetering for some time, with months of weak performance. REITs and real estate stocks have been selling off strongly over the last couple of days and the reason is clear—the last thing the already weak housing market needs is higher borrowing costs.
FINSUM: We think the move higher in rates and yields could spell a significant downturn for real estate. Prices are so high and demand is already starting to dry up, so higher yields may have a further dampening effect.
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(Miami)
Anyone who has been even remotely watching the real estate market this year will note that the housing sector has been struggling. The well documented issues in the real estate market have caused housing stocks to have a very weak year, with multiple homebuilders recently hitting 52-week lows. This has made some worry that trouble in housing may be a leading indicator of an economic downturn to come. However, historically speaking, the opposite has been the case. Housing (combined with automotives) account for just 6.5% of GDP right now, the historical low end of their range, which is good news. Traditionally, it has been when housing gets to be a major part of the economy (e.g. 10% pre-Crisis) that trouble comes.
FINSUM: The trouble in housing has much less to do with the wider economy than it does with industry-specific factors like demographics, planning restrictions, and saturation. We do not expect housing to be necessarily representative of the direction of the US economy.
(New York)
Goldman Sachs has a new kind of fund it is offering, and we thought advisors might like to hear about it. In what are being called “tax-eating” funds, Goldman is offering the opportunity to invest in “opportunity funds”. These special funds, which are provided for in the new tax code, are designed to promote investment in low-income communities. Interestingly, the funds are deferred from capital gains tax until 2026, so clients can move their capital gains into these funds and shield them from taxes. Doing so will ultimately result in a 15% reduction in capital gains taxes on the original gains, and 0% taxes for any gains on the opportunity funds themselves.
FINSUM: Goldman Sachs has been doing this kind of investing for years, and now the tax change has really put wind in its sails. Seems like it may be worth looking into.
(New York)
Retail has been doing great lately and may be poised to continue its gains. However, the best way to play the sector might not be to buy retail stocks. Instead, consider buying real estate stocks that would gain from retail’s success. With that in mind, Barron’s has run a piece choosing seven real estate stocks that will benefit from retail’s growth: Simon Property Group, Link REIT, Brixmor Property Group, Public Storage, and Mid-America Apartment Communities.
FINSUM: Make no mistake, these are deeply contrarian bets given the challenges mall and other retail REITs are facing. That said, if the strategy works, it may do so in a big way.