REITs take on new shine amid Fed’s softened view on rates

Investors scoop up REIT shares because of their large dividends, strong earnings growth.

  • By Jessica Menton,
  • The Wall Street Journal
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The Federal Reserve’s dovish tilt this year has been a boon for real-estate shares that were pressured by a threat of higher interest rates.

Rising rates punished shares of real-estate investment trusts in two ways: They cut into home sales and reduced the relative appeal of the sector’s hefty dividend payments. But as the Fed has shifted its tone this year, saying it will be patient with future rate increases, investors have been scooping up REIT shares because of their large dividends, strong earnings growth and cheap valuations.

S&P 500 real-estate stocks have advanced 12% this year, in line with the broader market. That is after slumping 5.6% last year. About $1.8 billion flowed into global real-estate equity funds in January, the first inflows after 23 months of outflows, according to fund tracker EPFR Global.

“Real-estate companies can overcome higher rates, but if the Fed’s on hold and borrowing costs are staying lower, that’s great for interest-rate sensitive companies,” said John Creswell, executive managing director at Duff & Phelps Investment Management Co.

U.S. stocks are off to their best two-month start to a year in roughly three decades, with the S&P 500 (.SPX) up 12%, helped largely by the Fed. As it eases its pace of policy-tightening, the payouts on U.S. government bonds are falling, pushing investors to consider whether they are better off shifting money into stocks such as REITs that typically deliver bondlike returns and could potentially bring higher yields.

“The surprising drop in yields and the drop in mortgage rates could potentially be another positive for housing and housing-related stocks going forward,” said Ryan Detrick, senior market strategist at LPL Financial.

The yield on the benchmark 10-year U.S. Treasury note has eased this year and was 2.755% Friday. That is well below November’s seven-year high of 3.232% as the Fed has scaled back its rate projections amid fears over slowing global growth. Yields fall as bond prices rise.

The 10-year yield is also below the 3.1% dividend yield offered by real-estate stocks in the S&P 500, which is among the highest in the index.

The markets will get a fresh glimpse into the state of the housing market this week, with new-home sales due out Tuesday. Data has been mixed in recent months, suggesting there could be more turbulence this year.

Economists surveyed by The Wall Street Journal expect sales of new U.S. homes to fall 9.4% to a seasonally adjusted annual rate of 595,000 in December after jumping 16.9% from a month earlier in November.

Investors will also get another snapshot of the health of the economy Friday when the government releases its February employment report, critical data that could stoke investors’ faith in the bull market that turns 10 years old Saturday.

“Things still look positive for 2019,” Mr. Detrick said. “It’s an old bull market, but there are still signs that the bull has some tricks up its sleeve.”

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