NEW YORK, Aug 7 (Reuters) - As the S&P 500 approaches fresh
highs, some investors hope to pick up bargains in the battered
U.S. real estate sector, where values of some major stocks have
been cut in half this year.
Coronavirus-fueled lockdowns and a major shift toward
working from home have weighed on residential and retail U.S.
real estate investment trusts. The sector has slid 7% this year
compared with a 3% gain on the S&P 500.
Yet investors say stocks in the sector could jump if a
coronavirus vaccine loosens the pandemic's hold on the U.S.
"You’re going to find more attractive spots in the REIT
space than you will in some areas of the market like technology,
that have the growth but are getting expensive,” said Mark
Freeman, chief investment officer at Socorro Asset Management.
Among his largest positions is Alexandria Real Estate
Equities Inc, which rents space for medical research,
and Prologis Inc, which owns warehouses used for
ecommerce fulfillment by companies such as Amazon.com Inc
Drugmakers will likely have tens of millions of doses of
coronavirus vaccines in the early part of next year, Anthony
Fauci, the top U.S. infectious diseases official, told Reuters
in an interview on Wednesday.
Such a breakthrough would be a boon for companies like mall
landlord Simon Property Group Inc, said John Creswell,
executive managing director at Duff & Phelps Investment
Shares of the company are down 58.2% for the year to date
and trade at a trailing price to earnings ratio of 9.6, less
than half of their 52-week high of 22.9.
The company, which is expected to report earnings on Aug.
10, is managing the effects of the pandemic by capping its
spending until consumers once again feel comfortable
congregating in large groups, Creswell said.
"They're showing that they can live with COVID, not just get
through COVID," Creswell said.
An extension of unemployment benefits and another stimulus
bill would likely provide an outsized lift to retail and
residential REITs that have lagged hot sectors such as data
centers, said Michael Knott, Green Street’s head of U.S. REIT
"Given that consumption is such a critical aspect of GDP,
bridging toward an environment that starts to look more normal
will be pretty important to the retail and residential space,"
There are plenty reasons to be skeptical of a quick rebound.
Enhanced unemployment benefits lapsed last week, and Congress
has, as of Friday, had failed to pass another stimulus bill that
would provide relief. Those enhanced benefits had funded
continued spending for many of the more than 20 million
Americans who have lost their jobs since February.
More than 30% of mall-based businesses and office tenants
are expected to withhold at least part of their rent payments
this year, according to estimates from Green Street Advisors.
Valuations in the sector also tend to vary widely, thanks to
rallies in warehouse and data-center stocks that have skewed
averages higher. Data center operator Digital Realty Trust, for
example, is up 31% for the year to date and trades at a P/E of
55.2. On the whole, companies in the sector trade at 37 times
earnings, compared to 24 for the S&P 500.
Still, Freeman of Socorro Asset Management has raised his
exposure to the REIT sector, expecting that consumers will
return to physical retail stores and workers will return to
offices once the pandemic is over.
He also plans on adding to his exposure to apartments and
retail centers, in part due to more attractive yields than those
available from government or corporate bonds.
"We are going to see how fundamentals play out before we
become much more aggressive, but we're starting to get much more
comfortable with the space," he said.
(Reporting by David Randall; Editing by David Gregorio)