There are a bunch of reasons to be investing in U.S. real estate right now. A housing shortage? That’s a good one. Low interest rates? That’s there too. The need for more data storage and a fix to the global supply-chain disaster? Bet you didn’t see that coming.

Real estate exchange-traded funds are raking in cash. The US$6.2 billion iShares U.S. Real Estate ETF, or IYR, posted US$1.3 billion of inflows last week, making it the second biggest gainer among ETFs after BlackRock’s S&P 500 behemoth SPY and marking its biggest weekly haul ever. Not to be outdone, the US$41.4 billion Vanguard Real Estate ETF, ticker VNQ, also was on the leaderboard, pulling in US$338 million. The fund has been hot for a little while, as it posted US$1.2 billion of inflows in May, its best month since March 2019.

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Real estate stocks have been thriving since the start of 2021, with the S&P 500 Real Estate Index posting a 23 per cent return, compared with a 12 per cent rise in the broader index. The gains have been led by the retail and residential companies investors wager on a surge in economic activity with the pandemic receding. Part of that explains the bid for IYR and VNQ, both of which have a near 40 per cent weighting in specialized REITs with holdings in entertainment properties like casinos and movie theaters. In other words, investors see them as a wager on a “return to normal” environment.

However, the funds have very little exposure to commercial and hotel real estate, which are big pieces of the “reopening trade”. Rather, 27 per cent of BlackRock’s IYR and 21 per cent of Vanguard’s VNQ are in four stocks: American Tower Corp., Prologis Inc., Crown Castle International Corp. and Equinix Inc. The companies specialize in data storage, wireless infrastructure and warehouses. Exposure to these stocks would suggest investors are taking a bet on storage and supply chain concerns.

Logistics proxy

“It seems investors are using real-estate ETFs as a means of capitalizing on global logistics concerns,” said Bloomberg Intelligence ETF analyst Athanasios Psarofagis, who also noted that industrial and storage REITs have held up better than hotels.

Even the US$1.2 billion Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF, or SRVR, which owns storage facilities for computer servers and the like, has rallied 11 per cent since mid-May. In the last week, data center REITs beat others with a total return of 4.6 per cent, strongly outperforming the Bloomberg U.S. REITs index.

“Flows follow performance, and REITs have outperformed the broader market by 500 to 600 basis points,” BTIG analyst James Sullivan said. “That’s one factor.”

As pent-up demand begins to be unleashed from housing to commodities, real-estate supply remains relatively low. Add in rising costs of building materials and a labor bottleneck, and the strong demand for property -- both commercial and residential -- is likely to go unmet. Similar to the situation in semiconductors, where a global shortage sent chip stocks soaring, REITs are likely to be seen as more valuable particularly as more of the economy gets back to work.

“The big increases you’ve seen in single family home prices is unprecedented in a recession and provides a lot of head room for apartment REITs,” added Sullivan.

Inflation hedge

Investors’ incessant hunt for returns is also likely playing into this, as many have rotated into utilities, consumer staples and real-estate stocks, sectors known for yield, last week while the long end of the Treasury curve declined.

“We’re seeing interest rates surprise a little bit. The 10-year yield remains in a trading range of 1.55 per cent to 1.75 per cent, but they’re inching their way down, which is usually good for REITs,” said Sullivan. “It would make sense that real estate or hard assets would offer some hedging protection for the broader market in the case of rising inflation.”

“From a yield angle, there is still enough cushion over the 10-year yield to make it attractive,” Psarofagis added. “However, if yields move higher, this sector could get hit.”