Real estate sector has sunk since its creation, and could spiral further

The S&P 500 real estate sector has been the market’s worst performer since its launch in September, and these high dividend-yielding names could see more difficulty ahead if rates move even higher.

The sector is down 10 percent since its first day as an official sector, while the S&P has gained nearly 2 percent in the same time.

Such poor performance comes as no surprise to S&P Global’s Erin Gibbs, who noted that after a strong start to the year, investors have recently been moving away from high dividend-yielding sectors and “toward value and riskier assets.”

“For the past 3 years, while we’ve been in this low interest environment, the REIT sector/Industry has hovered between 35 and 45 forward earnings, clearly commanding a premium for the dividends paid out and moving in the opposite direction of the yields,” Gibbs wrote in an e-mail to CNBC.

Real estate investment trusts (REITs) had been one of the best-performing groups in the first six months of the year, gaining nearly 9 percent in that time while the S&P gained 3 percent.

But Gibbs noted that around June, when the 10-year note yield began rising, REIT names saw a sharp drop in valuations.

“As long [as] interest rates are expected to rise I would expect valuations to continue to remain towards the bottom of their historical range in the mid 30’s,” Gibbs wrote.

The real estate sector carries an average dividend yield of 3.6 percent, versus that of the S&P 500 at 2.1 percent, she noted.

JPMorgan earlier this year forecasted that the sector would see inflows of as much as $100 billion upon its creation.

Just before the sector’s debut, some market watchers were skeptical of the group continuing its gains.

“Real estate has been a huge winner over the last seven and a half years, the total return is up something like 400 percent. But now it’s facing pretty stretched valuations, and more importantly, it’s probably fighting an unfriendly [Federal] Reserve,” Eddy Elfenbein, editor of the Crossing Wall Street blog, said the day before the sector debuted, forecasting its downside.

The Vanguard REIT index fund, which tracks the performance of real estate-related names, is down nearly 5 percent in the last six months. Its top holdings include Simon Property Group, Public Storage and Prologis.

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