REITs provide investment opportunity in recovering US
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One of the brightest spots in the US economy is the residential market. While economic figures in other areas such as consumer spending and employment might have gone through a "soft patch" in March, US housing prices and sales continue to show strong imp
After the bursting of the bubble in 2007-09 when prices plummeted by more than 30 per cent, the US housing market took almost three years to stage a sustained recovery. Since mid-2012, the S&P/Case-Shiller Home Price Index has risen by more than 8 per cent.
The outlook is very promising given the limited supply of new and resale homes. Housing inventory is at a record low and monthly supply of new homes is also low because of restrained construction.
Historically low mortgage rates and the improvement in the labour market also help fuel housing demand in the United States. The sustained improvement in the housing market will create a “positive feedback loop” within the US economy, where higher housing prices stimulate construction, which stimulates the labour market, which stimulates demand for new homes.
Investors wanting to get in on the US property market recovery can do so through real-estate investment trusts. REITs are companies that own and manage a portfolio of real-estate properties. REITs earn income from renting space or selling property and by law must distribute 90 per cent of their profits via dividends.
REITs offer a great benefit of diversification. A player with limited money can invest in several REITs that own properties in many geographical areas and operate across many businesses such as residential and office spaces, shopping malls, hotels, industrial storage and hospitals. They also offer superior liquidity to direct investment in real estate.
The MSCI US REIT index offers a 3.2-per-cent dividend yield, or 1.5 percentage points higher than the interest rate of 10-year US Treasuries, which is quite generous compared with the pre-crisis level when the dividend yield was 0.5-1 percentage point below the 10-year interest rate.
Dividend growth is also impressive at 14 per cent in the past year. From a long investment perspective, US REITs have produced an average annual return of 11.6 per cent in the past 10 years.
Provided the backdrop of strong property-market recovery, REITs are expected to be one of the best-performing asset classes, generating attractive investment income and great potential capital gains.
Komsorn Prakobphol, a senior investment strategist at Tisco Wealth, can be reached at www.tiscowealth.com or [email protected].
