Rising interest rates are pinching publicly traded real estate investment trusts (REITs) this year, but there’s evidence confirming that the real estate sector’s overall fundamentals remain stout.
That favorable fundamental outlook could open the door to opportunity with assets such as the Virtus Duff & Phelps Global Real Estate Securities VGISX. The actively managed VGISX carries Morningstar five-star ratings for the trailing five- and 10-year periods and focuses on global real estate securities, potentially making it an ideal avenue for investors looking for value in a sector that’s arguably been punished too harshly this year.
While VGISX has the flexibility to take a global approach, the bulk of the investable, listed real estate universe is comprised of U.S.-based companies, and that’s a plus at a time of dollar strength.
“Real estate is largely domestic and should be more insulated from increased cost pressure from reshoring. There are also pockets of real estate, such as industrial real estate investment trusts, that are likely going to benefit from reshoring, with increased demand for domestic warehouses and industrial activity,” wrote Bank of America strategists Savita Subramanian and Jill Carey Hall in a report out last month.
Making VGISX all the more appealing is earnings quality. At a time when investors are increasingly concerned about S&P 500 earnings growth, particularly in growth-heavy sectors, real estate could be a refuge of earnings steadiness.
“Consensus 2022 earnings per share has risen 10% year-to-date and real estate, energy, and utilities are the only sectors with more upward revisions to earnings estimates than downward revisions over the past three months," noted the BofA strategists. “Moreover, 77% of real estate companies posted positive real sales growth (versus CPI) in the second quarter, much better than just 54% for the S&P 500.”
Among Bank of America’s preferred real estate sub-sectors are industrial, residential, and retail. That’s a positive for VGISX investors because, as of the end of the second quarter, the fund allocated over 54% of its weight to those three groups.
“Quality is a key attribute to stock outperformance late cycle. We believe higher quality REITs will offer the best earnings and distribution growth in 2022 and 2023,” added the Bank of America strategists.
At the end of the second quarter, the average market capitalization of VGISX components was $19.64 billion, according to issuer data.
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