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Portfolio > Alternative Investments > Real Estate

REITs Poised for More Gains, Driven by Demographics

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Despite some uncertainty about U.S. Federal Reserve plans for interest rates in December and a slight slowdown in new and existing home sales, the real estate market, and especially REITs products, continues to grow in both assets and performance.

During the 11th BMO Capital Markets Annual Real Estate Conference in Chicago in September, several prognosticators gave upbeat assessments about the market.

One BMO analyst noted that “REITS do best during Goldilocks markets,” and another said that with public REITs accounting for only 10%-15% of the market, the switch from private to public investments could also mean big growth.

The numbers seem to bear out these predictions. A Citi Research report stated that $22.5 billion in new flows entered the REITs market this year, largely due to the low interest rate environment. Negative global interest rates are also pushing the trend. Close to $18 billion of REIT inflows came from Japanese investors looking for greater returns.

As of mid-September, the best performing REITs sectors for the year were data centers (+29%), Net Lease (+26.8%) and Industrial (+25.5%), according to the BMO Real Estate Weekly and Preferred report from mid September. These vary from 2015, when storage, manufactured homes and apartments were best performers. Both apartments and storage have negative returns this year.

Experts still project that millennials and elderly will continue to pave the way for the prime direction of REITs, more specifically in multi-family housing and senior care assisted living as well as medical care facilities. 

As Debra Cafaro, chairman and CEO of Ventas (VTR), noted at the BMO conference   “10,000 people turn 65 every day, so that can gauge the growth for REITs.” In fact, one of the best performing REITs in 2016 through mid-September was Senior Housing Properties Trust (SNH), which was up 53.7% through mid-September.

Jeff Jacobson, global CEO of LaSalle Investment Management, which manages a $60 billion global real estate portfolio, said during his luncheon keynote that he believes that growth in multi-family properties will increase, but mainly in urban areas, and luxury urban complexes are the highest risk investment right now.

Vacancy rates are at their lowest levels, causing near-term supply issues, according to Jacobson. On the demand side are millennials in urban areas who rent and like to have all the services they need, such as grocers, health clubs, offices and more, within walking distance.

“The U.S. is the bright spot of global real estate economy,” said Jacobson, noting the inflows of funds from overseas.

That said, later panelists cautioned to expect continued disruptions in certain markets, such as hotels, which are fighting off Airbnb competition, as well as closings or changing uses of large retail or big box stores (i.e. Macy’s) or even hospitals.

Many large box stores are already being repurposed and many health care facilities are adding or switching to trauma centers or changing their focus.

John Thomas, president and CEO of Physicians Realty Trust (DOC) noted that with only 10% of the medical market in REITs, they see it as a big driver of change.

When asked what were some factors that could become a drag on REIT investments, experts cited general global economic instability. Said one, “Uncertain interest rates are bad for REITs as banks don’t lend.” Others expected low interest rates continuing into next year, no matter what direction the Fed takes.

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