With this interest rate thing up in the air yet, I feel it will happen in December. Just my guess. What is better to buy: REITs or Utilities? As I believe it will be one and done for awhile. Which one is more resilient? Have you seen the 10-year bond? It's backing up faster than Duke could tree a 'coon! Could be a miss market price here. I'm hoping for more down side pressure on REITs an Utilities.
God bless.
the Pudd
Comments
I guess my view is that I really would focus on best in breed REITs - best balance sheets, best management, best buildings, etc. I don't want all the little mediocre REITs - and I think there's a lot of them. I also don't love certain sectors; I think there will be consolidation in malls, but the era of dime-a-dozen malls in this country is - I think - either over or close to being over.
I think with utilities it's also a matter of ability or not in regards to raising rates, but that may involve regulations and other restrictions. I'd feel better about REITs, despite the volatility involved with many of them.
I will say a very large position is Brookfield Property Partners (BPY). This is not a recommendation, from the standpoint of it is an MLP and results in a K1. That said, what you have is a global platform of very high/class A real estate in major markets combined with excellent management. You also have a fairly sizable discount to book value, which management has stated that it wants to narrow. Additionally, Brookfield Property has a % of the portfolio devoted to opportunistic investments and it can invest in the parent's real estate funds.
They have said regarding interest rates: "Interest Rates
The prospect of rising interest rates has been on the table for several years now. Based on the
measured recovery of the U.S. economy, we are expecting a steady, muted rise in rates and we
have been making our real estate investment decisions under the assumption that 10-year rates
would increase in the near future. The spread between cap rates and interest rates has been
abnormally high in recent years which tells us the market has already been acting in anticipation
of higher rates. We do not believe a 100- to 200-basis-point rise in interest rates will impact our
business in any meaningful way.
While real estate stocks have been negatively affected by rising interest rate commentary, the
appetite for premier commercial real estate has not abated. There is a clear disconnect between
how the public market is valuing real estate versus what we are seeing from institutional
investors, and we will continue to look for opportunities to capitalize on this arbitrage. "
This is the fairly substantial investor's day presentation from a few weeks ago:
http://www.brookfieldpropertypartners.com/_Global/53/documents/relatedlinks/7125.pdf
There are other REITs that appeal, though - I do think some of them are expensive and I'd be more interested after a fairly significant pullback (Vornado and Boston Properties being two large examples, along with Equity Lifestyle Properties, among others.) More broadly, I think we're probably near the top in terms of apartments. I do like healthcare, some offices and communications infrastructure REITs.
Will REITs come down further? Maybe; I still think some of the majors are expensive beyond the fears of rate increases. However, there are certain individual names that I'm interested in and Brookfield Property is something that I'll just continue to add to.