Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
Cohen & Steers: The Right REITs for Realty
06/08/2017 2:56 am EST
We own real estate investment trusts (REITs) through Cohen & Steers Realty Shares (CSRSX), explains Bob Carlson, fund expert and editor of Retirement Watch.
Three factors pushed REITs down in the last month. There were reports that regulators are concerned about bank lending for commercial real estate projects and urged banks to curb that activity.
Investors should realize that’s good for most established REITs, because less lending for construction makes overbuilding less likely.
Rising interest rates are another factor. Since REITs traditionally have high yields, many investors consider them to be income investments and sell them when rates are rising.
Unlike bonds, however, REITs often do well when rates are rising. If rates are rising because the economy is growing, that’s good for REITs. They can raise rents and will have lower vacancy rates.
A third reason is the rise of online sales which are taking business from established retailers. A number of retailers have scaled back operations or declared bankruptcy this year.
Fortunately, CSRSX is a focused fund. It is selective about the real estate investments it owns and insists on quality management and a sustainable business model.
The demise of struggling retailers will hurt lower-tier shopping centers and malls, but quality properties will do better as the industry consolidates.
I expect REIT returns to improve later this year. The economy is growing, and unemployment is low. That means higher rents and lower vacancy rates for most owners of commercial real estate.
CSRSX first develops an economic outlook. Then, it determines which real estate sectors and which REITs will benefit from that outlook.
The fund’s analysts engage in a deeper analysis and have more detail about each company than probably any other REIT investors.
In addition to seeking quality companies likely to benefit from the economic outlook, the fund wants to buy only REITs selling at reasonable prices.
The fund’s top sectors are offices (21%), apartments (17%), data centers (10%), health care (6%) and hotels (6%). While the fund has significant positions in office buildings, it is not indiscriminate in its purchases.
It looks for REITs focused on areas with strong economic growth and a good balance of supply and demand. Top holdings in the fund are Simon Property Group (SPG), UDR (UDR), Prologis (PLD) and AvalonBay (AVB).
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