Business

REITs continue to decline in value in Q3, but analysts are bullish on outlook (NYSEARCA: XLRE)


REIT real estate investment trust icon.  Word real estate investment trust REIT concept on notes on beautiful orange background.  Business REIT real estate investment trust concept.

Dzmitry Dzemidovich

Real estate continued to decline in Q3 with the FTSE Nareit All Equity REITs falling 11.1%, the SPDR ETF for the real estate industry (NYSEARCA:XLRE) fell 11.87%, while the broader S&P 500 index (NYSEARCA:SPY) decreased only 5.28%.

Everything is real real estate sector decreased. Self-hosted resorts and Hostels are relatively better performers, while diversification is a notable lag point.

YTD, FTSE Nareit All Equity REITs index down 29.25%, SPDR ETF for real estate sector (XLRE) fell 30.5%, while the broader S&P 500 index (SPY) decreased by 24.76%. Industry is the main driving factor, while Self-Storage Resorts and Lodging are relatively better performers.

Real estate came under pressure during the quarter as the Fed raised rates by 150 bps in two meetings to a 3%-3.25% margin. The Fed’s aggressive fight against inflation is expected to push interest rates to 4.4% in December, weighing on the property market.

Below are the performance results of the sub-sectors.

REITs have dropped a lot lately. They fell mainly due to rising interest rates and the Federal Reserve has made it clear that they expect to raise rates again in the near term, based on Search Alpha Author Jussi Askola.

It looks like REITs are likely to drop even more in the near term. However, stock prices can recover as quickly as they drop, and a change in market direction is always a surprise, Askola noted.

Many investors are expecting that inflation and high interest rates will hold back the warming property market, and as a result they are quick to assume a 2008-style collapse for REITs, By Riyado Sofian speakadded that his opinions differ.

REITs have historically outperformed the market during periods of high inflation. This is because REITs have a high operating margin of around 60%. Furthermore, higher rents could be an inflationary buffer, according to Sofian.

Additionally, REITs’ balance sheets are the strongest they’ve ever had, the analyst noted.

Equity REITs have outperformed broad stocks year-to-date, Author Global X ETFs speak.

We rate the outlook for REITs positively as their current yields are attractive and rising compared to traditional fixed income and equity, according to the author.

Here are some ETFs to watch for: Vanguard Real Estate ETF (NYSEARCA:VNQ), Real Estate Select Sector SPDR ETF (XLRE), Vanguard Global formerly a US Real Estate ETF (NASDAQ:VNQI), iShares Mortgage Real Estate Capped ETF (BATS:REM), iShares residential real estate limited ETF (NYSEARCA:REZ), iShares US Real Estate ETF (IYR), Pacer Funds Trust – Pacer Benchmark Industrial Real Estate SCTR ETF (INDS), ETF Series Solutions – NETLease Corporate Real Estate ETF (NETL), SPDR Homebuilders ETF (XHB), IndexIQ ETF Trust – IQ US Real Estate Small Cap ETF (ROOF) and the Hoya Capital Housing ETF – Hoya Capital Housing ETF (HOMZ).

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