Real Estate Sector Rating: Marketperform

What is the real estate sector?

It includes equity real estate investment trusts (REITs) and companies engaged in real estate development and operation.

The Real Estate sector’s domestic orientation and relatively high yields have made it a safe haven of sorts during times of heightening trade tensions and falling interest rates—as we’ve seen recently with the coronavirus (COVID-19) epidemic. 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.

In this low-interest-rate environment, REITs’ sensitivity to interest rates has risen dramatically, in part due to investors’ search for yield and dramatic increase in debt. Short of a significant catalyst, we expect the interest rates to fall, depending on the global economic impact of the epidemic, which is a macro tailwind to REITs. However, with the relative weak fundamentals and valuations, we are maintaining a neutral rating on the sector.

Overall, we continue our marketperform rating on the group.

Sector Overview: Real Estate

Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.  

Source: Charles Schwab, as of 03/05/2020.

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

Communication ServicesHealth Care
Consumer DiscretionaryIndustrials
Consumer StaplesInformation Technology
EnergyMaterials
FinancialsUtilities

 

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Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Risks of the REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.

Investing involves risk including loss of principal.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.