June 15, 2019

Real Estate Funds Have Been a Balm in a Stinging Market

Real Estate Funds Have Been a Balm in a Stinging Market

Conventional wisdom says rising rates hurt real estate. The logic behind this is simple, said Jennifer Cookke, a lecturer in the Center for Real Estate at Massachusetts Institute of Technology. “You typically have debt on a property,” she said. “So when interest rates rise, costs are higher, and that reduces profit.”

The managers of the Neuberger Berman Real Estate Fund delved into whether rates really do damp R.E.I.T.s and learned that the effect was often temporary, said Brian Jones, who manages the fund with Mr. Shigekawa. “What we found is, in periods where interest rates were spiking, the performance of R.E.I.T.s suffered,” Mr. Jones said. “But if you go six and 12 months beyond a rate spike, R.E.I.T.s shares typically recover and do very well.”

E-commerce’s effects won’t be sloughed off so easily. They can be summarized in a single name: Amazon. The online giant (and other e-commerce companies) is changing how people shop and raising questions about the need for physical storefronts.

Steven J. Buller, portfolio manager of Fidelity Real Estate Investment Portfolio, said he foresaw continued demand for bricks-and-mortar stores — just fewer of them. “There’s too much retail space in the United States — 24 square feet a person, which is twice as much as Canada,” which has the second-highest amount in the world, he said.

This country has 1,200 shopping malls alone, Mr. Buller said. “There are 400 class-A malls, and I think those will survive. The other 800? I don’t know.” Mr. Buller has allocated about 20 percent of his fund to retail holdings, and the Simon Property Group, the country’s largest mall R.E.I.T., is among his top stakes.

An investor who wants to bet on real estate must make the usual choice between actively managed funds, like those offered by Neuberger Berman, T. Rowe Price and Fidelity, and passively managed indexed offerings.

The latter include the Vanguard Real Estate Index Fund (which is also offered as an E.T.F.), the Schwab U.S. R.E.I.T. E.T.F. and the SPDR Dow Jones R.E.I.T. E.T.F.

A misconception of some investors is that they’ve already diversified their portfolio with real estate because they own a house and perhaps a vacation rental, said Mr. Jones, of the Neuberger Berman fund. That sort of ownership is a narrow bet on one or two markets, comparable to owning one or two stocks instead of, say, an S&P 500 index fund. “You don’t derive the same diversification benefit that you can get from a R.E.I.T. fund,” he said.

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