Due to strong fundamentals, the real estate sector can provide investors with positive returns even when markets are turbulent.
This is key in today’s low-yield environment, says Peter Hardy, vice president and portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.
“One of the nuances [of] real estate is there has been very strong fundamental strength in the sector,” he adds, even though we’re “in a period where we’re seeing relative degrees of economic weakness, say in the energy sector or materials sector.”
In the private market, he notes, “rents are going up, [so] income from real estate and valuations of private real estate are going up.”
And, in the publicly traded real estate market, “the yield orientation of the sector is attracting investors. [There’s a] dynamic going on where private investors are valuing real estate higher than the public market, so you’ve seen acquisitions.”
For example, says Hardy, a Chinese insurance company purchased the Waldorf Astoria Hotel in late 2014 for more than $1 billion. And then, in September 2015, private equity firm Blackstone bought Strategic Hotels and Resorts in a $6-billion deal.
These acquisitions are noteworthy, he says, because they demonstrate the continued strength of the real estate market. “Companies are coming in [to] purchase public real estate companies as a means to gain large exposure to the market.”
And there’s more opportunity on the commercial real estate side, says Hardy. “On the personal side of things, if you include single-family homes, those exposures can be high. But, on the commercial side, there has been limited new supply and limited new building, in the U.S. especially. That’s leading to strong rent growth and fundamentals.”