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Interest Rate Environment Favors Hotel, Apartment, Industrial Sectors, Fund Manager says

01/22/2014 | By Sarah Borchersen-Keto

Interest Rate Environment Favors Hotel, Apartment, Industrial Sectors, Fund Manager says

Today’s changing interest rate environment should prompt REIT investors to target sectors with short lease durations and sensitivity to an improving economy, according to Scott Crowe, global portfolio manager at Resource Real Estate.

Crowe manages the Resource Real Estate Diversified Income Fund (RREDX), which launched in March. Between its inception and the end of 2013, the fund was down 3.42 percent, outperforming the FTSE NAREIT All REITs Index by approximately 1 percent during that period. Crowe also manages the Resource Real Estate Global Opportunity Strategy, which launched in September.

In an interview with REIT.com, Crowe said investors should also consider more prime real estate, where high levels of rent growth are being boosted by low supply, as well as opportunities in international markets.

“I do think it’s a game changer, this shift in the economy. It directly affects how you’re positioned within your real estate allocation,” Crowe said.

Crowe generally advocates a balanced approach that involves exposure to a variety of asset types. In the current environment, he points to REITs in the hotel, apartment and industrial sectors as examples of where investors should position themselves.

Net Lease Concerns

One concern of Crowe’s is that investors have become over-allocated in net lease companies.

“Unfortunately, net lease, just due to the structure of the asset type, doesn’t really enjoy the benefit of the improving economy, but gets all the headwind,” Crowe said.

Crowe stressed that although the economy is recovering, it is not a particularly robust recovery. That makes careful asset allocation that much more important, according to Crowe. He noted that an extended initial stabilization phase may mean that the current real estate cycle will end up being longer than what investors expect or are used to. Part of that protraction is due to the lack of new supply in the market, and Crowe expects this situation to persist.

“It’s really going to take a very large excitement of animal spirits to get people to take that risk,” he said.

International Diversity Important

Meanwhile, Crowe is urging investors to consider opportunities abroad: “I think international diversity is going to be extremely important.” He explained that while the United States has been one of the best-performing REIT markets so far since the financial crisis, “our view is that other parts of the world offer better value… that relates mostly to Europe, and so that’s where we’re putting more money to work.”

Back in the U.S., Crowe doesn’t expect a lot of initial public offering (IPO) activity with REIT shares trading at a discount to net asset value.

“Right now, you don’t have that level of premium which is going to encourage a lot of companies to come public,” he said. Instead, more restructurings and mergers and acquisitions could take place.