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A way to play real estate

Housing and construction have been steadily recovering. Consider screens to find REITs.

  • Active Trader News
  • – 06/26/2014
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Housing and construction indicators have generally been exhibiting a steady recovery, and housing stocks and real estate investment trusts (REITs) have clearly benefited. For example, the Dow Jones U.S. Real Estate Index is up more than 12% in 2014 as of mid-June, and has risen roughly 200% since the March 2009 bottom.1. Of course, this is in direct contrast to the years immediately preceding the March 2009 bottom when the housing market crashed and real estate prices plummeted.

REITs offer a direct way to trade the real estate securities market. If you have got a particular view of the real estate market, you may be able to find a REIT that aligns with your strategy.

What are REITs?

Common stock REITs are real estate–based securities that trade similarly to stocks. This is in contrast to Unit Trust Funds and Depository Receipts, which may not trade similarly to stocks, as well as REOCs, or real estate operating companies, which can be considered non-traded REITs. REITs typically own income-producing real estate—including office buildings, apartments, shopping centers, and storage facilities.

REIT qualifications

To qualify as a REIT, a company must:

  • Invest at least 75% of its total assets in real estate.
  • Derive at least 75% of its gross income as rent or mortgage interest from real property.
  • Distribute at least 90% of its taxable income to shareholders in the form of dividends.

Publicly traded REITs generally own commercial real estate, which has different investment characteristics from residential housing. Direct ownership of commercial property, unlike ownership of single-family residential property, is unrealistic for most individuals due to high capital requirements. REITs offer one way for individual investors to get exposure to the commercial real estate asset class. Real estate exposure can also be obtained through a variety of different types of securities, including common stocks, bonds, preferred stocks, and commercial mortgage backed securities (CMBS).

An extremely important factor to consider when trading in these securities is that illiquidity is an inherent risk associated with investing in real estate and REITs. There is no guarantee the issuer of a REIT will maintain the secondary market for its shares, and redemptions may be at a price which is more or less than the original price paid. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.

REIT opportunities

Because REITs trade much like stocks, it is possible for active investors to trade these securities over a short- and medium-term time horizon. Moreover, opportunities abound as the size of the REIT market has never been larger. According to the National Association of Real Estate Investment Trusts (NAREIT), there are more than 160 publicly traded equity REITs in the U.S. today, with a collective market capitalization above $700 billion as of the end of April 2014 (see the chart below).

If you think REITs might be appropriate for your strategy, the screener on Fidelity.com can help you find REITs to trade, based on your outlook. You can access this page by going to the stock screener on Fidelity.com and selecting Common Stock (REIT) in the “Start a Screen by Security Type” section.

There are a number of filters you can use to hone in on the REITs that might fit your strategy. For instance, momentum can be a significant factor in the market—one that can greatly influence REITs. There are several performance momentum filters you can apply to see which REITs have been accelerating and which have momentum at their backs.

Large-cap REITs with the best average daily price growth for the last five days, divided by the average daily price growth for the last month, as of June 26, 2014, are:

  • Wireless and broadcast communications infrastructure company American Tower (AMT)
  • Integrated REIT Vornado Realty Trust (VNO)
  • Seniors housing and health care real estate firm Health Care REIT (HCN)

In addition to momentum, you can look for REITS that are exhibiting bullish candlestick patterns to generate short-term trading opportunities. Large-cap REITs that have made a recent bullish, short-term candlestick pattern, as of June 26, 2014, are:

  • Shared wireless infrastructure operator Crowne Castle International (CCI)—hammer pattern on 6/19/2014
  • Seniors housing and healthcare properties company Ventas (VTR)—inside bar pattern on 6/18/2014
  • Single family rental property developer HCP (HCP)—hammer pattern on on 6/18/14

Investors with a medium-term trading time frame may be more interested in REITs with a strong income component and relative value. Large-cap REITs with the highest dividend yield and the lowest price-to-book ratio, as of June 26, 2014, are:

  • Single family rental property developer HCP (HCP)
  • Seniors housing and health care real estate firm Health Care REIT (HCN)
  • Seniors housing and healthcare properties company Ventas (VTR)

Funds from operations

Funds from operations are accounting earnings less depreciation expense, deferred taxes, and gains or losses from sales of property and debt restructuring.

There are other fundamental factors that active investors may want to consider in the REIT space. Funds from operations, for example, are widely accepted as a particularly useful way to measure the operating income growth of a REIT.

Large-cap REITs with the highest funds from operations during the most recent quarter, as of June 26, 2014, are:

  • Industrial real estate operator and developer Prologis (PLD)
  • Wireless and broadcast communications infrastructure company American Tower (AMT)
  • Multi-family residential property developer Equity Residential (EQR)

Trading REITs

Although REITs trade like stocks, they do present some unique characteristics that can uniquely affect their price action. For instance, REITs generally feature moderate income growth potential because they pay out a large percentage of their income. This may influence the volatility of how a REIT’s price moves. Moreover, while REITs tend to trade like the broader stock market, strength or weakness in the underlying housing and commercial real estate market exerts significant influence over these securities.

Other factors to consider include how REIT income is taxed, the potential impact of changes in interest rates, and the quality of REIT management. For example, income received from REIT investments may be treated as ordinary income, qualified dividends, capital gains, or as a return of capital for tax purposes.

Seek to maximize your probability of success by fully understanding the factors that influence REITs before considering trading in them. If you are interested in trading securities tied to the housing market, REITs can be a valuable tool to implement your strategy.

Learn more

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaim any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
1. Source: FactSet.
A REIT is a security that trades like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. A REIT is required to invest at least 75% of its total assets in real estate and to distribute at least 90% of its taxable income to investors. Illiquidity is an inherent risk associated with investing in real estate and REITs. There is no guarantee that the issuer of a REIT will maintain the secondary market for its shares, and redemptions may be at a price that is more or less than the original price paid.
The bullish candlestick patterns are determined by Recognia and is a stock screening criteria. Recognia Technical Event® opportunities are available through the Stock Screener. Technical Events® occur when recognizable patterns appear in the trendline of a security price chart as identified by third party, Recognia. Technical analysis of a chart attempts to determine the direction, strength, and duration of the trend, in order to forecast the most profitable moment to execute a trade.
Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry, which may affect the fund or funds.

Past performance is no guarantee of future results.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

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