Indications from Fed officials on raising the key interest rate multiple times over the next two years have spread jitters in the REIT industry. But fiscal stimulus, like tax reduction and infrastructure spending expected under Donald Trump’s presidency, are likely to boost demand, fuel economic growth and push up inflation. And when economic growth picks up steam and inflation rises, prices of real estate generally increase while rent and occupancy of properties go up.
This should give sufficient boost to long-term investors to find good buying opportunities in the sector as many of REIT stocks with solid prospects are undervalued currently.
Moreover, with the majority of REITs yet to report this earnings season, the time is now to explore industry fundamentals and the past-quarter performance to figure out their chances of beating.
Usually an earnings beat serves as a catalyst, raising investors’ confidence in a stock, leading to rapid price appreciation and ensuring more gains from one’s investments. Further, buying an earnings play with less initial investment, for their current low valuation, translates to great returns when the stock eventually trades at a higher price.
How to Select the Best Stocks?
However, selecting the best stock is a daunting task as not every REIT stocks is poised for a robust performance this earnings season. This is because, apart from the rate factor, the performance of REIT stocks depends on the individual asset class dynamics. In the fourth quarter, not all the asset categories showed solid strength in their fundamentals.
In fact, office and industrial asset categories hogged the limelight for experiencing high demand. Going by numbers, per a study by the commercial real estate services’ firm CBRE Group Inc. (CBG - Free Report) , for the U.S. industrial market, availability fell for 26 straight quarters to 8.2% in the fourth quarter. Also, the overall office vacancy rate declined 10 basis points (bps) to 12.9% in fourth-quarter 2016, denoting the lowest level since first-quarter 2008.
