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By Steve Brown - January 15, 2019
Not only am I optimistic about REITs in 2019, I think they’ll outperform the equity markets.
Why am I so enthusiastic? For two reasons, primarily. First, I think dividends and the stability of earnings will play a huge role. And second, the U.S. Federal Reserve has indicated that it’s approaching a neutral posture on interest rates. In other words, it appears that the string of rate hikes we’ve seen is coming to an end. That’ll present a real tail wind to REITs, as opposed to the head wind of rising rates in 2018.
Specific to REITs, I like residential properties in 2019. But I’m not so optimistic about hotels, for example, because we appear to be getting close to the end of the current economic cycle. If that’s the case, it would hurt hotel earnings due to potentially lower consumer spending.
Check out my 2019 investing outlook video, where I also break down which geographies I’m more interested in—and not—and what keeps me up at night in the current environment.
We think REITs will outperform the stock market in 2019 as dividend and stability of earnings pull the way through.
2019 is shaping up to be a good year for REITs, as the income and the growth profile compares favorably to other asset classes. REITs have about a 4.2% dividend yield, and we expect earnings growth of 4.5% in 2019. And expectations are for that growth level to be maintained or perhaps slightly increasing throughout the year.
If the Federal Reserve is done with increasing interest rates, then REITs can be a primary beneficiary of that. It was a headwind for them in 2018, but in 2019 it would be a tailwind—and I think that the earnings profile and the pricing levels of REITs are very active in 2019.
REITs were not the most favored asset class recently, as people were enamored with the growth profiles of tech stories, the growth of their IPOs, etc. Whereas REITs were more of a "steady Eddie" performer, they weren't a cyclical business. They generate good income and solid earnings per share, but they weren't the hot kid in the block for a rising rate environment.
I think that now that's we're done, the rate hike cycle, now that we're past the cyclicality growth cycle of the economy, REITs with their stable earnings and really focus on honing income producing real estate will show the importance of the combination of both stable income, but also a healthy dividend and a growing dividend.
Residential REITs look attractive, whether it's apartment REITs, single family rental or manufactured housing. What we're seeing is the higher rates has made housing very expensive and it's causing people to rent for longer.
The healthcare sector's setting up nicely. Senior housing's been a part of the healthcare REITs space. It's been hit by supply growth. That supply's starting to slow down and we're seeing continued growth and demand from the 82-year-old to 84-year-old segment of society, and that's continuing to grow. So we see a good taking off point and demand for senior housing, in terms of much better fundamentals in 2019 versus 2018.
We think some of the cyclical areas of real estate will have a difficult time in 2019, such as hotels and industrial REITs, particularly in hotels because of the end of the cyclical uplift will not be a good backdrop for both hotel companies and hotel REITs.
Internationally, we still like parts of central Europe such as Germany, Switzerland and the Netherlands. They have sound economic policies in place and good supply demand fundamentals for real estate. So they're in an attractive spot for 2019.
In the Ear East, China had a difficult 2018 but they put in a number of policies to ease money for their economy there. We think we may see signs of green shoots in the Chinese economy in 2019.
What keeps me up at night is concerns about policy mistakes, whether it's overshooting on interest rate increases or just tightening money supply too much whether it's in the UK, Europe, or in the Far East. What keeps us up at night is policy mistakes.
We think in a lower return world in 2019, where mid to high single digits is very attractive, REITs are going to deliver those type of returns. I think investors have been spoiled the last couple years and have enjoyed really strong returns on the market of 12, 13, 14, 15%. Those returns could go back to mid, single digits in 2019, and REITs with dividends and yields of four, four and a half percent and earnings growth of about four and a half percent, show very well in that environment.
Economic activity around the world is softening, which Sr. Portfolio Manager Brent Puff believes could make finding future growth more challenging.
Co-Chief Investment Officer Gregory Woodhams explains why this second round of tariffs could be more damaging than the first.
Portfolio Manager Prabha Ram is focusing on companies that have sustainable growth in their mix as she looks at investments for the rest of 2019.
If market growth rates slow to single digits in 2019, Sr. Portfolio Manager Steve Brown believes REITs and their dividends could become more attractive.
January 15, 2019
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
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