For U.S. real estate investment trusts (REITs), nothing could have been better if history repeated itself in 2015. This is because the REIT sector had a dream run in 2014, with the FTSE NAREIT All REITs Index gaining over 27%, thanks to Treasury yields and interest rate movements. But this momentum fizzled out in 2015, with the sector bobbing up and down without warning.
And while December’s 25 basis-point increase in the target funds rate by the Fed was widely seen a confirmation of domestic economic recovery, we don’t see any respite from the underlying threats to the REIT sector. Even the FTSE NAREIT All REIT Index managed to make a flimsy 2.29% run up in 2015.
Given their capital-intensive nature, REITs are more likely to be hurt in a rising rate environment as they will have to incur higher interest expense. On top of this, their dividend payout (which has been the major reason for their attraction) might end up looking less attractive than the yields on fixed income and money market accounts.
Therefore, worried about the safety of their portfolio, investors have started dumping several stocks in this sector. Even though this might seem like the only thing to do in such a situation, an analysis on the price decline in REITs will show that selling all of these stocks is a foolish thing to do now.
Why? Because often a stock is dumped due to the broader industry issues, or fiscal and monetary policies, which, in reality, might hardly have any significant impact on a company’s business.
So before keeping beaten down stocks at arm’s length, find out whether their negatives have been blown out of proportion. Also, find out whether at all their fundamentals and prospects will suffer.
In fact, if you look at the positive side of the rate hike, we see that it was backed by upbeat economic data. Gains in employment and growth in wages actually mean increased buying power and improved spending trends. And when economic activity gathers steam, demand for space automatically grows.
But supply of new space has remained low in most of the real estate categories as economic weakness in the past restrained landlords from developing newer properties. This, in turn, is leading to favorable demand/supply conditions. In fact, property fundamentals are improving, occupancy levels rising and landlords now have more power to command higher rents for their real spaces.
In fact, low valuation in stocks with good long-term growth potential might give investors a solid entry point. Therefore, although people fear buying stocks when they are up for sale, adding them with less initial investments can usher in great returns when they eventually appreciate.
How to Pick Such Stocks?
