Most people thought it might never happen, much less happen in five short years.
The housing sector is back in the United States.
After going through its darkest hour, people are buying houses again, and investors are making money from dividends and capital gains.
Today I want to talk about a different way to play the housing recovery: real estate investment trusts (REITs).
There are all kinds of REITs, from shopping centers to housing to apartment REITs.
With even the hardest-hit markets recovering (like Phoenix and Orlando, Fla.), you might think apartment REITs would be going gangbusters. Surprisingly, that’s not the case.
Last year, U.S. housing REITs returned 19.7 percent. In contrast, apartment REITs were ahead only 6.9 percent, according to the National Association of Real Estate Investment Trusts (NAREIT). In fact, the apartment REIT sector was the worst-performing sector in the entire index in 2012.
So what gives?
For starters, some investors say that since single-family homes are seeing an influx, fewer people are moving into apartments. That is causing investors to focus their attention on housing REITS.
But that’s a mistake.
David Lee, who manages a $3.6 billion real estate fund for T. Rowe Price, recently said this about REITs: “People believe it’s a zero-sum game, that if for-sale housing is doing well, then rentals will not do as well.”
In fact, Lee says it’s a “win-win situation.”
Andy McCulloch, head of Research at Green Street Advisors, which specializes in U.S. real estate trends, agrees, saying there’s a “misconception that growing momentum in the single family market will hurt the rental market.”
So how could it be that if the single-family housing market is booming, then the apartment rental sector is also doing well? The answer comes from different projections based on how many new households will be formed between now and 2016.
In that time, some 5.5 million new households are expected to be formed. Of these, 3.8 million, or nearly 70 percent, will be renters, says Jeffrey Friedman, CEO of apartment REIT Associated Estates Realty Corporation (AEC).
It’s that astronomical number that has me calling America the “Renter Nation.” And it’s why I am considering apartment REITs today.
This is just the start of the good news for apartment REITs. Those 3.8 million renters are going to be fighting with each other for less and less space.
Let me explain.
The uptick in new households is going so fast that demand is outpacing supply by 2.5 million apartments, according to a March report from NAREIT.
This supply/demand dynamic could lead to increasing income for apartments.
That, plus the 2012 underperformance of apartment REITs, makes this an opportune time to enter the sector.
You would think with numbers like these, the financial media would cover more apartment REITs, but they seem focused on people buying single-family homes. However, you can use that to your advantage and jump in before other investors.
If you want to use REITs as an easy way to play the surge in demand, then there are several options.
The larger REITs such as Equity Residential (EQR), AvalonBay Communities, Inc. (AVB) and Camden Property Trust (CPT) offer yields of about 3 percent. But I just recently profiled an apartment REIT in High-Yield Investing that yields about 7 percent. (Out of fairness to my subscribers, I won’t give away the pick.)
Risks to consider: Of course, with investing, nothing is guaranteed. A slowdown in the economy could slow the pace of new households, and rents could remain flat.
Action to Take —> With that said… thanks to strong occupancy rates, rising rents, increasing household formation and a supply-demand gap, apartment REITs may be a good place to put some money right now.
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