Mounting inflation and interest rates have put significant pressure on several sectors — especially real estate. But some market watchers think things could be about to turn around. “I think it would be an opportune time to invest in real estate especially given that we are forecasting interest rates to decline over the next 12 months,” according to Kevin Brown, senior equities analyst at financial services firm Morningstar. He suggests that investors look to have 10% of their portfolio exposed to “real estate in some form, as a good rule of thumb.” “That exposure can come from REITs [real estate investment trusts] or direct ownership, or other real estate investments if you are a large investor. But REITs present a great and easy opportunity to the asset class which is otherwise difficult to invest in. With rate cuts anticipated, I expect REITs to outperform the broader U.S. market this year,” Brown told CNBC Pro on Feb. 14. Rick Romano, Head of Global Real Estate Securities at PGIM Real Estate, agrees, saying that REITs offer investors “a unique and fantastic” opportunity to invest across geographies and segments right now. Commercial property pick One segment Brown likes is commercial properties occupied by tenants such as drugstores, retailers, food outlets and gas stations. The diversity — and the fact that tenants are selling necessities — mean they are not overly sensitive to economic conditions and can post gains even if a recession hits, Brown said, naming Realty Income as a REIT to consider. Realty Incomes says its portfolio includes over 13,000 commercial properties with a 98.8% occupancy rate. “Realty Income has a triple net lease structure, which means their tenants are responsible for everything, [namely] all expenses that can be generated by the property. They are also a conservative tenant with low rents relative to the revenues generated by tenants so there’s a very low risk of it not receiving rent,” Brown said. He also flagged that the company is part of the S & P 500 Dividend Aristocrat index and has raised its dividend payout for 25 consecutive years. The REIT has a 5-year average dividend yield of 4.5% and is trading at around a 10% discount to net asset value — a key measure of a REIT’s value — according to FactSet data. Boom in data centers Aside from commercial spaces, PGIM’s Romano sees opportunities in data centers. He expects a shortage of supply in 2023-2024, “in conjunction with this very severe demand spike due to AI right now.” “It’s an area that we see some of the best growth rates within the real estate space,” he added. Among the data center-focused REITs that Romano’s PGIM Global Real Estate Fund is invested in are Prologis (8.1% of the fund as of Dec. 2023) and Equinix (5.3% of the fund). Prologis — which owns almost 800 properties globally, including a number of data centers — is trading at a premium of around 4% to net asset value. Equinix, with 250 data centers, is trading at a premium of around 17% according to FactSet data. Senior housing buys? Morningstar’s Brown highlighted the senior housing market as a segment to watch, particularly in the U.S. as the baby boomer generation ages. “We’re going to have very high demand growth,” he said, highlighting that the Covid pandemic reduced building activity and, as such, supply is not keeping up with occupancy levels. REITs he likes include Ventas — which has over 1,400 properties including senior housing facilities and outpatient medical buildings across the U.S., U.K and Canada — as well as Welltower , which has exposure to senior housing, outpatient care facilities and care spaces. “Ventas, in particular, is trading at a very big discount,” Brown noted. “Both names are buys into the bigger senior housing theme.” Ventas is trading at discount of around 3% to its net asset value, according to FactSet, while Welltower is trading at premium of around 55%.
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