U.S. real estate sector on the rise

By Martha Porado | May 9, 2013 | Last updated on May 9, 2013
3 min read

U.S. real estate stocks are performing well.

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And this will continue for the next 12-to-18 months, says Jason Yablon, vice president and portfolio manager at Cohen and Steers in New York. He manages the Renaissance Global Real Estate Fund.

The sector’s “fundamentals are pretty good, though you do have to segment it by region in order to really understand where we are in the different economic cycles. The big picture [is]… around the world you see an improvement from a real estate perspective,” he adds.

There’s also improvement in bank, health and financing sectors, meaning the global economic backdrop is positive.

And despite job numbers being weaker than expected in the U.S., there’s been around 2% growth in GDP. Yablon says is this upswing is “underpinned by an improving housing market, which we think will help drive growth towards the end of this year and the next.”

Read: Will REITs remain profitable?

He adds, “As long as there is positive GDP growth, there will generally be positive demand for real estate space.”

Right now, Yablon says the real estate market is poised for outperformance because there is little growth in supply. This boosts real estate fundamentals.

That’s because “rents are moving up and not much is being built to curtail [growing demand] trajectory except in the apartment space.”

Further, “On the financing side, interest rates are very low. [Since] real estate is an easily financed asset, you can acquire assets and get very attractive returns on equity,” points out Yablon.

Read: Condos drag down house market

As a result of this ideal situation, demand for real estate overall is steadily increasing. He adds, “Asset values have been increasing since the drop of the recession, so there’s been a very good backdrop for real estate stocks in general.”

Yablon also finds “access to equity is extremely efficient today. The capital markets are open for publicly traded real estate companies, and they’ve been raising equities in a very meaningful way. [Companies] have been using capital to go out and acquire properties to help grow their earnings per share.”

He adds, “Right now, companies are generating good internal and external growth. They’re getting cash earnings growth of more than 10% per year, this year and next year. Because the companies have all fixed their balance sheets and dividends post-recession, we’re back into the point of very healthy dividend growth.”

Read: U.S. home prices rise 10.5%

They’re looking at earnings growth of approximately 11%, as well as a 7% surge in dividends.

With such healthy fundamentals, it’s easy to ignore potential problems, however. Yablon warns, “For most property types, there’s not a lot of financing being offered for development.”

Investors have to watch this, but he says, “We don’t see the positive fundamental backdrop changing in any dramatic form in the near term.”


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Martha Porado