Real estate equities were some of the best performers in 2019 as the broader U.S stock market continued to hit record highs. Favorable economic conditions made up of low-interest rates, as well as steady domestic led economic growth, are some of the catalysts that continued to drive the segment. The 11-core U.S real estate ETFs attracted more than $5 billion in capital inflows amidst renewed investor interest, consequently marking the best year for capital inflows on REITs ETFs.
Danger of Non-Traded REITs
For this article, I am talking about traded real estate investment trusts (REIT) and not the REITs that not traded and typically structured as a limited partnership. Non-traded REITs are extremely high risk, and many investors have lost 100% of their investment with these types of products. ABS News and research recently wrote an article about one called Northstar REIT, where investors have lost substantial about their investments.
One of the most significant issues with non-traded REITs is liquidity because investors can not easily see prices on the exchanges to sell their investments. Investors can quickly tell if they have a traded REIT vs. a non-traded REIT by checking to see if the REIT is listed on a public exchange. If it is listed with prices and the investor can buy or sell, then it is a traded REIT. If the investor must contact the company for prices and not quickly sell or buy their shares, then it is a non-traded REIT.
REITS ETFs Capital Inflows
The Vanguard Real Estate ETF was the best performing REIT ETF, having attracted more than $2 billion in capital inflows. Coming a close second was the JPMorgan BetaBuilder REIT ETF that attracted $1 billion in capital inflows. SPDR Dow Jones REIT ETF was the only major REIT ETF that registered capital outflow as total outflows stood at $2.6 billion.
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A good number of the REIT ETFs clocked record highs in addition to attracting vast chunks of capital inflows. The performance ranged from between 18 and 25%, much higher than the five-year average of 7.3%. REITs focused on the core sectors like cell towers were some of the best performing, amidst strong demand in the market.
An uptick in capital inflows into Real Estate ETFs stemmed from an influx in investors seeking diversified exposure to real estate investments. The fact that REITs come with a vast portfolio of properties was one of the reasons why investors continued to invest in them on being relived the burden of carrying out extensive research and analysis of properties. Likewise, the need to diversify investment portfolios also continued to draw investors into REITs with vast, high-quality portfolio holdings.
REITs Investment Trends
REITs with high-quality properties at the back of lower advantage profiles continued to outperform the overall industry on experiencing increased investor interest. In contrast, REITs with a high quadrant of dividend yields continued to underperform.
Unlike in the past, investors are no longer focused entirely on dividend chasing when it comes to real estate investments. Instead, the focus has shifted towards investing in REITs with high-quality properties. CBL & Associates is one of the REITs that has paid the ultimate price amidst changing investor sentiments.
Amidst the soaring investor interest on high-quality REITs ETFs, the segment continues to experience a significant increase in innovation when it comes to ETF lineup. In 2018 there were five new launches followed by two more in 2019.
NETLease Corporate Real Estate and Hoya Capital Housing were the two REIT ETFs that lit the sector going as far as outperforming all the major REIT ETFs in the U.S. The trend is likely to persist in 2020 as managers seek to provide investors with a way to customize their investment portfolios.
The U.S real estate segment looks set to continue outperforming amidst favorable economic conditions made up of low-interest rates and robust economic growth. Unlike in the past, when giants mostly dominated the industry, a disruption appears to be in play amidst an influx of new entrants and innovative indexes that continue to enjoy strong investor interest.
Investors are especially taking a keen interest in REITs ETFs with high-quality properties on their portfolio. REITs ETFs with low debt levels also continue to elicit strong demand. Instead of investors chasing yields, the focus is slowly shifting towards REITs with long-term dividend growth potential as well as total return.
Going forward, innovation should be a key consideration when it comes to REITs ETFs investments. Investors should continue to focus on REITs with vast diversified properties on their portfolios capable of catering to their needs as well as investment objectives.