The Real Estate sector’s domestic orientation and relatively high yields have made it a safe haven of sorts at times of heightening trade tensions. It also has benefited from investors’ search for yield.
On the positive side, low interest rates have enabled real estate investors to buy property with relatively “cheap” money, which provides the potential for greater income. An expanding U.S. economy typically helps the real estate area, as rental rates increase for apartments, retail and office buildings. Also, as a result of the 2008 financial crisis and housing market crash, as well as demographic factors, demand for apartments has been strong, supporting rental rates and benefiting those companies that have a stake in that arena.
However, there are still areas for concern. For instance, because apartment demand has been strong, businesses have rushed to meet the need, which could lead to an eventual oversupply in apartments.
Online retail sales also have risen at the expense of physical stores, pressuring mall-related real estate investment trusts (REITs). However, we believe the “death of brick-and-mortar stores” story has been overdone. From media reports you would think online sales have completely overtaken brick and mortar, but e-commerce made up only about 10.7% of total retail sales at the end of Q2, according to the U.S. Census Bureau.
Overall, the rough balance of the risk and return characteristics in the Real Estate sector leads us to continue our marketperform rating on the group. We also suggest investors not use high-dividend-paying Real Estate stocks as a replacement for fixed income securities.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Real Estate sector.
* As represented by the S&P 500 index
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