Amid greater uncertainty following the results of a tumultuous national election, health care real estate investment trusts (REITs) may be a bright spot among other real estate sectors.
Just as they fared well during the recession thanks to their demand-driven real estate assets, health care REITs, including the “Big 3”—Welltower (NYSE: HCN), Ventas (NYSE: VTR) and HCP Inc. (NYSE: HCP)—remain a top opportunity for investors in 2017, according to a recent analysis by investment research firm Morningstar.
“We also think health care REITs—including Welltower, Ventas and HCP—represent a noteworthy, reasonably priced opportunity due to a robust, relatively noncyclical demand outlook and positive industry trends that should help maintain strong cash flow generation and insulate these firms from economic volatility,” the report reads.
Much of the uncertainty across the markets and greater economy have stemmed from President-elect Trump’s potential policy positions, or lack thereof. REITs saw a quick drop in their market values after the election—a reaction possibly tied to a higher likelihood that interest rates would soon rise. By contrast markets rallied and continually reached new all-time highs for several days in a row on Trump’s perceived pro-business stance.
“The unexpected results of the U.S. presidential election have had a tremendous impact on the markets even though proposed policy details behind the incoming administration’s agenda are still largely unknown,” the report reads.
The hit to REITs’ market values was likely more related to rising interest rates. Higher interest rates, which impacted REITs’ purchasing power in 2016, could stall the recent investor interest in the REIT sector, Morningstar predicts.
“To the extent that low interest rates have diverted investor funds to REITs searching for higher yield and capital preservation, the same funds could flow out of REITs if interest rates rise, further pressuring commercial real estate valuations,” the Morningstar report reads.
While the Federal Reserve effectively raised its target federal funds rate in December—and has plans to boost it up to three times in 2017—interest rates are still likely to remain historically low in the near term, according to Morningstar, which would allow a continued path for growth.
Equity REITs also were recently granted their own category as an asset class on the Global Industry Classification Standard (GICS). The reclassification reflected the real estate sector’s momentum, and some speculated that the move could boost exposure and investor interest, potentially to the tune of $100 billion.
The recent hit to REIT share prices could make them an attractive opportunity—Morningstar’s real estate coverage is trading at a 7% discount to its fair value estimates, the firm reported.
Written by Amy Baxter