2018 outlook: real estate

Undervalued retail REITs who survive the threat from online retailers look attractive.

  • Investing in Sectors
  • Real Estate
  • Sectors
  • Investing in Sectors
  • Real Estate
  • Sectors
  • Investing in Sectors
  • Real Estate
  • Sectors
  • Investing in Sectors
  • Real Estate
  • Sectors
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

It's no secret that the growth of online retailing during the past decade has captured market share and shifted retail spending patterns among American consumers. This trend has not only put pressure on sales and profits for some retailers, but dampened sentiment and performance for retail real estate investment trusts (REITs)—the publicly traded entities that own retail shopping malls and strip mall centers.

However, we believe certain retail REITs have advantages that will allow them to remain viable and grow amid this increasingly competitive environment, even as the market recently has been uniformly punishing the stocks of all but a handful of them.

In particular, we have been focusing on retail REITs with property ownership in prime locations—those near dense and affluent populations. In these locations, in-store shopping traffic and sales growth generally has been growing steadily in recent years. Over the long-term, we believe REITs that have been focused on maintaining and enhancing their real estate portfolios in these types of premier locations represent attractive long-term investments. At the same time, we have been avoiding REITs with properties concentrated in less-populous, less-affluent locations, as these strike us as especially vulnerable to weak productivity and store closings.

Our view is that brick-and-mortar retail real estate is not going away. Sales growth among brick-and-mortar retail stores has been positive every year since 2009, and was up 2.0% year-over-year in 2016 (see chart). Retail real estate has been changing to reflect new shopping and entertainment trends. Successful malls and shopping centers have increasingly been prioritizing experiences over buying "things." This includes securing leases with experience-based tenants such as restaurants, movie theaters and other entertainment venues that are far less vulnerable to online sales competition.

Certain REITs are also able to benefit from another trend in the marketplace—predominantly online businesses (such as Amazon.com, Warby Parker, and Bonobos, among others) that have started opening physical stores to showcase their products and provide hands-on experiences for customers. It's another way in which certain retail REITs are adapting to the changing landscape.

Meanwhile, we believe the weakened sentiment for retail REITs in general has been overly punitive for many of the better-positioned companies. Depressed valuations for certain retail REIT stocks provide attractive opportunities going into 2018, as we look to distinguish between the potential "winners" and "losers" in the marketplace.

While our portfolios have generally been underweighted in retail REITs relative to their respective benchmarks, we have been prioritizing those we believe are positioned well to address the competitive threat of e-commerce. Our focus: retail REITs that own the highest-quality, best-located properties; that are attracting the right mix of tenants; and that are trading at undeservedly cheap valuations due to investors' skepticism about the future of brick-and-mortar retail.

Next steps to consider

Research the Fidelity® Real Estate Investment Portfolio (FRESX).

Get more investing ideas and sector insights.

Go back to the full 2018 sector outlook.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
Steven Buller is a portfolio manager at Fidelity Investments. He currently manages several portfolios that invest in REITs and other real estate securities, for both U.S. and foreign investors. Samuel Wald is a portfolio manager at Fidelity Investments. He currently manages several portfolios and subportfolios that invest in REITs and other real estate securities.
Andrew Rubin, an institutional portfolio manager who is a member of the REIT equity and high income real estate debt teams, also contributed to this article.
Views expressed are as of Dec. 1, 2017, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
References to specific investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
A REIT issues securities that trade like 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 total assets in real estate and distribute 90% of its taxable income to investors. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. 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. Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.
Index definition
The Cisco® Global Cloud Index (GCI) is an ongoing effort to forecast the growth of global data center and cloud-based IP traffic. The forecast includes trends associated with data center virtualization and cloud computing.
It is not possible to invest directly in an index. All indexes are unmanaged.
Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.
Sectors and industries are defined by the Global Industry Classification Standard (GICS®).
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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

818829.3.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.