Bargain-hunters look to US real estate stocks as S&P nears records

New York

AS THE S&P 500 approaches fresh highs, some investors hope to pick up bargains in the battered US real estate sector, where values of some major stocks have been cut in half this year.

The novel coronavirus-fuelled lockdowns and a major shift towards working from home have weighed on residential and retail US real estate investment trusts (Reits).

The sector has slid 7 per cent this year, compared with a 3 per cent gain on the S&P 500.

Yet, investors said, stocks in the sector could jump if a Covid-19 vaccine loosens the pandemic's hold on the US economy.

"You are going to find more attractive spots in the Reit space than you will in some areas of the market - like technology - that have the growth but are getting expensive," said Mark Freeman, chief investment officer at Socorro Asset Management.

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Among his largest positions is Alexandria Real Estate Equities, which rents space for medical research, and Prologis, which owns warehouses used for e-commerce fulfilment by companies such as Amazon.

Drugmakers will likely have tens of millions of doses of Covid-19 vaccines in the early part of next year, top US infectious diseases official Anthony Fauci said in a recent interview.

Such a breakthrough would be a boon for companies such as mall landlord Simon Property Group, said John Creswell, executive managing director at Duff & Phelps Investment Management.

Shares of the company are down 58.2 per cent for the year to date and trade at a trailing price to earnings (P/E) ratio of 9.6 - less than half of their 52-week high of 22.9.

The company, which is expected to report earnings on Aug 10, is managing the effects of the pandemic by capping its spending until consumers once again feel comfortable congregating in large groups, Mr Creswell said.

"They are showing that they can live with Covid-19, not just get through it," he said.

An extension of unemployment benefits and another stimulus bill would likely provide an outsized lift to retail and residential Reits that have lagged hot sectors such as data centres, said Michael Knott, Green Street's head of US Reit Research.

"Given that consumption is such a critical aspect of gross domestic product, bridging toward an environment that starts to look more normal will be pretty important to the retail and residential space," he said.

There are plenty reasons to be sceptical of a quick rebound.

Enhanced unemployment benefits lapsed last week, and Congress has, as of last Friday, failed to pass another stimulus bill that would provide relief.

More than 20 million Americans who have lost their jobs since February. Those enhanced benefits had funded continued spending for many of them.

More than 30 per cent of mall-based businesses and office tenants are expected to withhold at least part of their rent payments this year, showed estimates from Green Street Advisors.

Valuations in the sector also tend to vary widely, thanks to rallies in warehouse and data-centre stocks that have skewed averages higher.

Data-centre operator Digital Realty Trust, for example, is up 31 per cent for the year to date and trades at a P/E of 55.2.

On the whole, companies in the sector trade at 37 times earnings, compared to 24 for the S&P 500.

Still, Mr Freeman of Socorro Asset Management has raised his exposure to the Reit sector, expecting that consumers will return to physical retail stores and workers will return to offices once the pandemic is over.

He also plans on adding to his exposure to apartments and retail centres, in part due to more attractive yields than those available from government or corporate bonds.

"We are going to see how fundamentals play out before we become much more aggressive, but we are starting to get much more comfortable with the space," he said. REUTERS