Real estate headlines seem to only focus on bad news right now, from remote work’s impact on offices to struggles for city center retail. That isn’t the whole story, however. Indeed, the “real” real estate story may instead be the potent opportunities the space is offering right now on top of its traditional use as a diversifier. VettaFi’s head of research Todd Rosenbluth hosted a panel discussion during VettaFi’s Alternatives Symposium Tuesday on the topic.
Speaking with Fundamental Income’s Co-Founder, Partner and the CIO Alexi Panagiotakopoulos and DWS Investments director of liquid real assets, Americas product, Ed O’Donnell, Rosenbluth hosted a conversation looking at misconceptions, opportunities, and ETFs in real estate.
Digging Into Real Estate as an Alternative
To start, the trio talked broadly about real estate as an alternative asset class. For Panagiotakopoulos, real estate isn’t just an alternative and a source of diversification to equities and bonds, it’s also seen its own innovations.
“We’ve also seen a significant amount of innovation where you’re seeing liquid alternatives, private non traded alternatives and prior institutional investment asset class is now becoming more available to the retail investment advisor,” he said. “As energy takes hold, as retail ecommerce continues to grow, and people look for experiential travel or dining out experiences, it’s going to revolve around real estate
To O’Donnell, real estate is offering some real positives in income yields and distributed dividends, diversification across various landlords in economic subsectors, and more.
“This is more of a fundamental earnings stream of return and liquidity here and you’re getting a quote unquote, alternative return stream,” he said. “But, you’re not taking on liquidity, transparency or exclusive leverage to access that you’re maintaining daily liquidity, high transparency and high trading volumes.”
Factoring in Interest Rates
Looking ahead, the interest rate environment, of course, has a big role to play. O’Donnell finds, however, that on top of a potential rate cut next year, high rates right now help reveal the best firms in which to invest.
“A lot of these REITs are good Very good balance sheets that are better able to withstand a higher rate environment than they have in the past,” he said, pointing to fixed vs. floating debt being at a 20-year high.
“Remember what Buffett said about the tide going out, you’re going to see dispersion from the haves and have nots,” O’Donnell added. “So the companies are in a better position than they have been a long time.”
Panagiotakopoulos added that for many in the real estate space, markets have been craving a direction from the Fed.
“You start to see the direction become clearer, and, you know, a pause in Fed rate hikes, and now you’re looking at potential cuts down the line,” he added. “You’re going to see the ability for cost of capital to improve, which means greater acquisition volumes, and the ability to continue to diversify portfolios.”
Bright Spots in Real Estate
Specifically looking at the headlines, Panagiotakopoulos addressed media’s overemphasis of office real estate issues. To him, that emphasis misses out on good performance from core real estate markets. For example, he noted, investors can find durable, consistent cash flows from the “landlords of the U.S. economy.” That includes, he said, examples like Amazon (AMZN) and FedEx’s (FDX) distribution centers, manufacturing facilities, daycares, and even convenience stores.
“A lot of these borrowers, unbeknownst to the general public are actual corporate, unsecured borrowers borrowing at the company level,” he said. “They’re not necessarily using asset backed CMBS leverage. They don’t have that same maturity wall or fixed to floating risk in a rising rate environment and actually benefited over the prior years by refinancing a significant amount of debt in 2021, when rates were at all time lows.”
O’Donnell added to the positive case for real estate underlining the NAV discount found in the space. U.S. REITS, he said, are trading at about a 9% discount. Historically, he noted, when the discount nears 10%, REITs have outperformed private real estate over the following years.
DWS Investments' and Fundamental Income's Real Estate ETFs
Both DWS Investments and Fundamental Income offer real estate strategies to play those takes. Fundamental Income brings the NETLease Corporate Real Estate ETF (NETL ) to the field, tracking the Fundamental Income Net Lease Real Estate Index for a 60 basis point (bps) fee.
NETL’s approach offers current income via investing in “net leases” in which the tenant pays all or a portion of taxes, fees, and maintenance costs on top of rent. Doing so has helped it return 10.5% over the last month per VettaFi.
DWS Investments, meanwhile, offers the DBX ETF Trust – Xtrackers International Real Estate ETF (HAUZ ). For a 13 bps fee, HAUZ tracks the iSTOXX Developed and Emerging Markets ex USA PK VN Real Estate Index. HAUZ invests in an index of publicly-traded global real estate securities in developed and emerging markets outside of the U.S., Pakistan and Vietnam. Turning 10 last month, HAUZ has returned 11.2% over the last month.
For more news, information, and strategy, visit VettaFi.com.