July 13, 2018 / 8:31 PM / 7 months ago

Investors eye bright spots in REIT sector

    By Sinéad Carew
    July 13 (Reuters) - While investors say they are wary of the
broader real estate industry in a rising interest rate
environment, some are still bullish on sectors such as self
storage and manufactured homes. 
    Real Estate Investment Trusts (REITs) are typically seen as
a defensive investment bet as their large dividend payouts
offset slow but predictable growth.
    The S&P 500 real estate index           has outperformed in
the last six months with a 5.8 percent climb compared with the
broader S&P 500's        0.4 percent advance. 
    REITs have been boosted recently on earnings strength and a
slump in U.S. Treasury 10-year yields. But some investors expect
them to lose steam if bonds yields turn higher, assuming that
the U.S. Federal Reserve keeps raising interest rates and the
economy stays strong. Investors typically prefer bonds to
defensive sectors like REITs when interest rates are rising.
    The REIT sector however is down 0.2 percent for the
year-to-date compared with the S&P's 4.7 percent gain. It
already lagged the S&P 500 for the last two years with a 7
percent rise in 2017 compared with the S&P's 19.4 percent
advance and no change in 2016 compared with the S&P's 9.5
percent increase.
    But some REIT subsectors, which have already outperformed
the real estate industry so far in 2018, may continue to climb.
    The FTSE Nareit Equity Self Storage index           has
risen 18.6 percent in the last six months and 10.6 percent
year-to-date making it the biggest gainer in the sector. Self
storage companies include Public Storage        , CubeSmart
         and Life Storage Inc        . 
    Even with these gains, and an oversupply of capacity, self
storage is still attractively valued, said Cedrik LaChance,
Director of REIT Research at Green Street Advisors.
    "In the last seven to eight years self storage companies
have become very adept at marketing online," said Bob Zenouzi, a
chief investment officer specializing in real estate at
Macquarie Investment Management. "People can't afford a home and
need to downsize. You have stuff and need to store that stuff."
    REITs that lease land to consumers who buy or rent
manufactured residences such as mobile homes also stood out.  
    The FTSE Nareit Equity Manufactured Homes index           
has risen 16.3 percent in the last six months and 8 percent
year-to-date. Companies in the sector include Equity Lifestyle
Properties         and Sun Communities        . 
    "We always love manufactured homes. It's ignored by too many
investors so it remains attractively priced," said Green
Street's LaChance who sees low capital spending costs as a key
advantage. "In real estate capex is really important and takes
away a lot of the economics."
    Macquarie's Zenouzi says that hefty price tags for
traditional houses are making manufactured homes more attractive
to cash-strapped consumers.  
    "Demographics are a tailwind because retirees want to
downsize. House prices are up. These are lower cost options." 
    Hotel REITs have also done well though some investors are
getting wary. They have been helped by a boost in business
travel due to U.S. economic strength and recent U.S. corporate
tax cuts. And when demand is strong, hotel REITs are better
placed to quickly raise rates for short-term customers than
REITs in long-lease sectors such as office or healthcare REITS.
    The FTSE Nareit Equity Lodging/Resorts index          
rising 4.8 percent in the last six months and 6.4 percent
year-to-date. But those gains may have run their course.    
    "The share prices are effectively pricing in this rebound of
corporate travel. Its priced in so aggressively we're starting
to see hotels as an expensive sector," said LaChance.
    Even if there are bargains in REITS, John Laforge, head of
real estate asset strategy at Wells Fargo Investment Institute,
in Florida warned against getting "over your skis" in the
broader sector. Instead he favors fast growing sectors like
industrials, healthcare or technology.
    "We're late in the economic cycle. It's very classic for
REITs to start underperforming," said Laforge who recently
downgraded the sector to 'neutral" from a "favorable" rating.

 (Reporting By Sinéad Carew
Editing by Chizu Nomiyama)
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