Investors in high yielding real estate investment trusts (REITs) are still living in 2020, and we can tap that for 7% dividends and higher prices in the weeks to come.
Let’s start where just about every investment story begins these days: the Spring 2020 Crash. One thing that stood out during this chaotic time was the relative ease with which workers made the switch to working from home. . This has raised concerns that companies are reducing their office space, an obvious drawback for REITs who own office towers.
On the retail side, shopping center REITs began seeking rent checks from store owners, who were facing both COVID restrictions and the accelerated transition to e-commerce.
It is therefore not surprising that the REITs made the decision at that time.
What is surprising, however, is that a year later, REITs are still far behind the market, even though their outlook is much brighter today. Now that 30% of the US population has received at least one dose of vaccines and some states are starting to reopen, real estate should be on an uptrend. And although IPFs have seen a bit of a bump in recent months, after the vaccines were approved, they have mostly moved to the side since.
This is our buying window. Now let’s take a look at why this contrarian opportunity exists and a 7% Return Closed Fund (CEF) that is well positioned to exploit it.
Why REITs are a coil spring
While it’s obvious the post-COVID office will be different than it used to be – with more ‘hybrid’ workspaces, where employees sometimes work from home and sometimes in the office, which seems likely – that doesn’t necessarily mean overall demand for office space will fall.
On the contrary, many companies are already reopening their offices, and it is not just “traditional” companies like banks and insurers. Facebook (FB
And when they reopen, expect a new standard to kick in, with the pandemic forcing companies to space their workers further and use space more creatively. It could actually cause After long-term demand for space, to the benefit of REITs that can adapt to this change.
Plus there’s the retail and restaurant boom that we all know is coming, with many people yearning to step out again once they feel safe. Already in the UK, which leads the US in terms of the percentage of the population vaccinated, potential customers are booking spots in pubs across the country weeks in advance.
A 7% payer designed for the post-COVID real estate market
This is where the CEF comes in, which I mentioned a second ago. This 7% yield, called the Cohen & Steers Quality Income Realty Fund (RQI), owns 159 REITs that own various types of real estate, with a cell phone tower owner American Tower (AMT) and self-storage company Public storage
The demand for cellular service has skyrocketed with many people stranded at home, boosting the American Tower. And public storage has seen an increase in demand for its services as closed online shoppers purchase more products for their homes.
Now, RQI is starting to pivot for a post-COVID-19 world with additional holdings in the retail space, and I fully expect this pivot to be successful, due to RQI’s strong track record in the navigating the changing real estate industry.
Before the pandemic, RQI’s NAV (which is our best measure of fund performance, as it tracks the performance of stocks chosen by its managers) beat the larger market by nearly a third from inception to early 2020, with a 9% annualized total return. Obviously 2020 has slowed the fund down, but not by much – that’s again beat the market as a whole, despite a terrible 2020 for REITs.
This is because RQI managers have long identified the right pockets of the property market, providing investors with a reliable stream of income. and capital gains along the way.
And in good times for real estate, the fund is a real workaholic. Take 2019, for example. During the previous year, fears of rising interest rates led to real estate being undervalued. This prepared real estate for a rapid rebound in 2019 – and RQI managers led the fund to a particularly strong gain that year.
And 2021 looks a lot like 2019 for real estate and the RQI. But the clock is ticking. Often times when this setup occurs, investors will aggressively buy into RQI, and it will likely happen again in the coming weeks.
Michael Foster is the senior research analyst for Contradictory perspectives. For more great income ideas, click here to view our latest report “Indestructible Income: 5 trading funds with safe 8.3% dividends.“