Stocks have been doing well this year, but we are willing to bet that the sectors that have been performing best over the last 12 months are not the ones you expect. With all the fears over rate hikes in the last year, it is hard to imagine that utilities and REITs are both up nearly 20% in the last 12 months, far ahead of the S&P 500’s 4.08%. Even tech is only up about 5%.
FINSUM: The most exciting thing about this performance is that the runway for income investments looks like quite strong—the Fed is unlikely to hike, which means there seems to be little rate risk.
If you are of the opinion that rates are not going to move higher, or if just want some great yields and aren’t too worried about rates, take a look at mortgage REIT ETFs. Mortgage REITs are a special subsector of the REIT industry, and have recently become greatly more accessible because of ETFs. For instance, consider the iShares Mortgage Real Estate ETF (REM). The fund has a 30-day SEC yield of 9.36%. It is obviously rate sensitive, but even during last year’s brutal hiking cycle, it only lost 3.75%.
FINSUM: If the Fed stays put this year, which it likely will, these could be a great investment as we head into a downward rate cycle.
Along with warehouse growth, data center expansion is one of the hottest areas of commercial real estate. So how to play it? These REITs were hit pretty hard at the end of the year, but they are now making a strong comeback. The big driver at the macro level is demand for cloud services and the growth of AI, both of which increase the need for data center space. Four stocks to look at are Equinix, CoreSite Realty (COR), Iron Mountain (IRM), and InterXion Holding (INXN).
FINSUM: Data centers seem to have some strong growth drivers behind them, and along with warehouses, we think they are strong ideas for REITs.
It would be easy to think that real estate is headed towards a buyer’s market. Inventory has been increasing, prices gains have slowed or disappeared, rates are rising, and prices are very high. However, despite all of this, many real estate experts think 2019 will still be a better year to be a seller than a buyer. The reason why is that inventory may only increase slightly, which will keep prices relatively high and not lead to massive price cuts like in the last housing downturn. A recession still looks a little way off, which could also insulate prices as the employment market stays tight.
FINSUM: We think the housing market is definitely going to see prices stay flat or fall next year, mostly because demand is falling as rates rise. However, we do agree that the bottom is not going to fall out by any means.
REITs are an interesting sector at the moment. The real estate sector is obviously past peak, and rates are rising, a double whammy for REITs. The initial reaction for many would be “stay away”, however, there is some value to be had. One interesting area is in regional mall REITs, which have actually outperformed the S&P 500 this year. There is a lot of variation in quality between different regional malls, however. In particular, the performance is bifurcating between the very best malls and the rest, with the former thriving, and the rest lagging.
FINSUM: The US has 1,000 malls and some estimates say there is only enough demand to solidly support around 300. The ones that stick around, particularly the top 20, will likely do very well.