Here’s An Easy Way To Gain From China’s Real Estate Woes

The implosion of China’s real-estate giant, Evergrande, is highlighting an unlikely winner: S&P 500 real estate stocks and ETFs. Many investors are missing out, though.


The crash of Evergrande, the largest property developer in China with $300 billion of liabilities, is masking an impressive real-estate rally. The Real Estate Select Sector SPDR ETF (XLRE) is up a market-topping 27.7% this year. That makes it the No. 2 top S&P 500 sector this year through Sept. 22, trailing only the energy sector’s slightly better 28.8% gain.

But here’s the rub. You probably don’t own much. Only 2.7% of the S&P 500 is in real estate. If you just own the S&P 500, you’re largely missing out. And on top of that, the real estate sector yields nearly 3%. That’s more than double the 1.3% yield on the SPDR S&P 500 ETF Trust (SPY).

It’s no surprise that pros are finding attractive opportunities in S&P 500 real estate — while China sours. It’s a standout for inflation-protected income, a way to play infrastructure spending and beneficiary of a snarled supply chain, making domestic property all the more valuable, says Bank of America securities in a report co-authored by equity strategist Savita Subramanian

“Real estate … is now the second best performing sector with improving fundamentals,” said the report. “It is our preferred marketweight sector, with a favorable macro backdrop and fundamentals.”

Don’t Assume You Own S&P 500 Real Estate

Many S&P 500 investors missing the real estate rally may not realize it. Yes, real estate is one of the 11 sectors in the S&P 500. But due to its nearly 6% drop in 2020, versus the S&P 500’s 16% gain, it only accounts for a tiny slice of the index.

Real estate’s 2.66% weight is the fourth smallest among the 11 S&P 500 sectors. And that fact overstates its importance a bit. It’s only marginally bigger than the 2.5% position of utilities, 2.47% stake of energy and 2.46% position of materials.

Strong gains in S&P 500 real estate, too, are a sharp contrast with China’s Evergrande situation. “Evergrande is saddled with massive liabilities, unfinished residential buildings and angry suppliers who have shut down construction sites,” said Jack Ablin, strategist at Cresset Capital Management. Evergrande’s stock price has evaporated. And Evergrande bond prices collapsed more than 70% since June, Ablin says.

But China’s real estate nightmare isn’t likely to spill over to the U.S., Ablin says. “Foreign banks have little exposure to Evergrande debt,” he said. Meanwhile, opportunities abound in mostly U.S. real estate.

Profiting From S&P 500 Real Estate

Focusing on U.S. real estate is clearly the path to more profit, versus Chinese stocks.

The five real estate ETFs with the most assets are up an average of more than 20% this year. There’s just one glaring exception. The $5.1 billion-in-assets Vanguard Global ex-U.S. Real Estate ETF (VNQI) is up just 6.5% this year. It’s held back by its 22% position in Japan, not to mention a 6.3% holding in Singapore, says

Contrast that against the 26.1% gain this year in the largest real estate ETF: $44.5 billion in assets Vanguard Real Estate (VNQ). It’s 100% invested in U.S. real estate.

Picking Your Spots In S&P 500 Real Estate

U.S. real estate is more diverse than it sounds — offering benefits to investors.

The sector is broken into 11 sub-categories, ranging from cell phone tower properties to hotels, says Bank of America. Such diversification stabilized the sector’s profit over the past five years, BofA says. Earnings volatility in the sector is less than the S&P 500’s for the first time since 2013. Additionally, real estate companies are mostly exempt from big tax hikes as they are not taxed at the corporate level, BofA says.

The top holding in the Real Estate Select Sector SPDR at 13.5% is cell phone property company American Tower (AMT). The stock is up more than 30% this year. In fact, all of the ETF’s roughly 30 holdings are up on the year. Shopping mall operator Simon Property (SPG) is the ETF’s top stock, up 57%.

Expect more income, too. The S&P 500 real estate sector is expected to boost dividends by 10% in 2022, BofA says, the second highest among S&P 500 sectors. That’s also more than the S&P 500’s expected 7% dividend hike.

But above all, shifts away from trade with Asia make U.S. property the place to be. “We believe globalization has peaked, especially given supply chain disruptions caused by Covid, motivating U.S. companies to lower their dependence on the region,” BofA said.

Top Performing S&P 500 Real Estate Stocks

All holdings in Real Estate Select Sector SPDR ETF are up this year, many by 30% or more

Symbol Company Weight in ETF Stock YTD % ch.
(SPG) Simon Property Group 4.3% 56.7%
(EXR) Extra Space Storage 2.4 54.7
(CBRE) CBRE Group 3.2 52.8
(IRM) Iron Mountain 1.3 51.9
(MAA) Mid-America Apartment Communities 2.2 50.2
(REG) Regency Centers 1.0 49.4
(KIM) Kimco Realty 1.3 42.7
(UDR) UDR 1.5 39.6
(FRT) Federal Realty Investment Trust 0.8 39.4
(AVB) AvalonBay Communities 3.1 39.3
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz


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