NEW YORK (Reuters) – As the S&P approaches 500 fresh highs, some investors are hoping to pick up wishes in the abusive U.S. real estate sector, where values of some major stocks have been cut in half this year.
Traders wear masks as they work on the floor of the New York Stock Exchange as the outbreak of coronavirus (COVID-19) disease continues in the Manhattan neighborhood of New York, FS, May 27, 2020. REUTERS / Lucas Jackson
Coronavirus-driven lockdowns and a major shift toward homework have given way to residential and retail U.S. real estate investments. The sector has slipped 7% this year compared to a 3% gain on the S&P 500.
However, investors say that shares in the sector could jump if a vaccine for coronavirus loosens the grip of the pandemic on the US economy.
“You will find more attractive spots in the REIT space than you will in some areas of the market, such as technology, which are growing but becoming more expensive,” said Mark Freeman, chief investor at Socorro Asset Management.
Among its largest positions is Alexandria Real Estate Equities Inc (ARE.N), which rents space for medical research, and Prologis Inc. (PLD.N), which owns homes used for e-commerce fulfillment by companies such as Amazon.com Inc (AMZN.O).
Drugmakers are likely to have tens of millions of doses of coronavirus vaccines in the early part of next year, Anthony Fauci, the top official of the American Infectious Diseases, told Reuters in an interview on Wednesday.
Such a breakthrough would be an injury to companies such as Simon Property Group Inc. (SPG.N), said John Creswell, executive director at Duff & Phelps Investment Management Co.
Shares of the company are down 58.2% for the year to date and are trading at a lagging price to earnings ratio of 9.6, less than half of their 52-week high of 22.9.
The company, which is expected to report profits on August 10, is managing the effects of the pandemic by limiting spending until consumers feel comfortable reuniting in large groups, Creswell said.
“They show that they can live with COVID, not just come through COVID,” Creswell said.
An expansion of unemployment benefits and another incentive bill would likely provide an expanded lift to retail and residential REITs that have hot sectors such as data centers, said Michael Knott, head of Green Street at US REIT Research.
“Given that consumption is such a critical aspect of GDP, moving to an environment that is starting to look normal will be quite important for the retail and residential space,” he said.
There are plenty of reasons to be skeptical about a quick rebound. Improved unemployment benefits expired last week, and Congress, as of Friday, failed to pass another incentive bill that would provide relief. Those enhanced benefits had funded continued spending for many of the more than 20 million Americans who have lost their jobs since February.
More than 30% of malls and office space companies are expected to withhold at least part of their rent payments this year, according to estimates by Green Street Advisors.
Ratings in the sector also tend to change extensively, thanks to warehouse rallies and data center strokes that have skewed averages higher. Data center operator Digital Realty Trust, for example, is up 31% for the year to date and is trading at a P / E of 55.2. Overall, companies in the sector trade revenue 37 times, compared to 24 for the S&P 500.
However, Freeman of Socorro Asset Management has increased its exposure to the REIT sector, expecting consumers to return to physical retail stores and workers to return to offices once the pandemic is over.
He also plans to add his exposure to apartments and retail centers, in part because of more attractive yields than those obtained from government or corporate bonds.
“We will see how fundamentals play out before we become much more aggressive, but we are starting to become much more comfortable with space,” he said.
Report by David Randall; Edited by David Gregorio
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