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5 Real Estate Fund Picks on Record Construction Outlay

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The real estate industry is off to a solid start this year ignoring the winter weather, which always acts as a resistance. Construction outlay touched a record high in January, while building permits remained unchanged. Existing home sales also posted record gains in January indicating that the housing industry is firmer than what most believed.

In February, the NAHB/Wells Fargo housing market index that reflects home builders’ sentiment continued to remain above the 50 mark, indicating improvement. Moreover, historically low mortgage rates and a rise in wages is expected to give the real estate industry a boost. Hence, it will be prudent to invest in real estate mutual funds for solid returns.

Construction Spending Rises in January

Outlays on construction rose 1.5% to a seasonally adjusted annual rate of $1.41 trillion in January from the upwardly revised estimate of $1.12 trillion in December, according to the Commerce Department. Constructing spending touched the highest level in January since Oct 2007. Spending also rose a whopping 10.4% year over year.

Money was spent on both private and public infrastructure. In the private sector, spending increased 0.5% to $831.41 billion in January from December’s figure of $827.35 billion. Single family residential construction and multifamily construction soared 7.7% and 30.4% from year-ago levels, respectively. Private non-residential construction too surged 11.5% year over year. Coming to the public sector, total spending increased 4.5% in January following a 3.3% monthly gain in December, with spending on educational facilities gaining a solid 11.7% year over year.

This sharp rise in spending in January came in after outlays gained momentum last year. In 2015, construction spending was up 10.5% to $1.097 trillion from $993.4 billion in 2014. This steady rise in spending toward new construction is a telltale sign of the health of the real estate industry.

Moreover, construction spending as a percentage of GDP rose 6.2% in the quarter ending Dec 31. This is a commendable rise from the year-ago increase of 5.8%. However, if we consider the last 50 years average during this period, spending gained 8.4%. This shows that the rise is still below the historical average, which in many ways represents pent-up demand.

Building Permits Remain Steady

There is also good news on the construction permit front. Building permits are a precursor to construction activity. It indicates the future growth of housing activities. Building permits were revised to a seasonally adjusted rate of 1.204 million in January, unchanged from December’s figure, according to the Commerce Department. Earlier, it was reported that permits were down 0.2% to a seasonally adjusted rate of 1.202 million in January.

Meanwhile, the other part of the report that shows the number of privately owned new houses on which construction has started was not so encouraging. In January, housing starts declined 3.8% to a 1.1 million annualized rate from 1.14 million in December. A crippling east coast winter storm was cited to be the reason behind this drop in housing starts.

If this be so, it is a seasonal factor, which in the long run won’t leave any impact. Moreover, with the job market strengthening, it is expected that demand for more construction will increase. Average hourly earnings gained almost 0.5% in January from the previous month’s figure to $25.39. Average hourly earnings also rose 2.5% year over year. And this happened while the unemployment rate declined from 5% in December to 4.9% in January, the lowest since 2008.

Record Home Sales

Existing home sales for January hit the highest level since July last year. This indicates that the housing industry is in better shape than earlier estimated. Existing home sales increased 0.4% in January to a seasonally adjusted annual pace of 5.47 million. This is contrary to the consensus estimate of sales of homes owned earlier dropping to 5.33 million from December’s revised pace of 5.45 million.

Additionally, existing home sales registered an annual increase of 11% in January, the largest yearly increase registered since Jul 2013. Pending home sales mostly track existing home sales. Pending home sales also advanced 1.4% in January from year-ago levels, its 17 straight month of year-on-year gains. However, purchase of new-single family homes decreased 5.2% in January from a year earlier.

Nevertheless, home loan rates are drifting downward, which is expected to boost home sales in the near term. The 30-year fixed mortgage rate is about 3.8%, while the 15-year fixed loan rate is down to around 3.2%. Rates are currently hovering at historically low levels.

5 Real Estate Funds to Invest In

Investors continue to remain optimistic about the outlook of the real estate industry in the U.S. According to KPMG’S 2016 Real Estate Industry Outlook Survey, 91% of real estate investors and executives surveyed said that real estate fundamentals will improve this year. Almost 74% of them believe foreign investment in the U.S. real estate will increase over the next 12 months.

Record rise in construction activities, steady permits for building activities and healthy surge in home sales at a time when weather plays a spoil sport have boosted their sentiment. Add to this, low mortgage rates and you know why they sound so confident.

Moreover, there are hints that spending plans on infrastructure may rise in the future. Democratic presidential candidates Hillary Clinton and Bernie Sanders have already promised to increase infrastructure investment. While Clinton plans to spend $275 billion on infrastructure, Sanders wants to deploy $1 trillion.

Banking on these positive trends in the real estate industry, it will be prudent to invest in funds related to the housing space. Here we have selected five such real estate funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio.

Franklin Real Estate Securities A (FREEX - Free Report) seeks to maximize total return. FREEX invests a large portion of its assets in equity securities of companies operating in the real estate industry.

FREEX’s 3-year and 5-year annualized returns are 8.2% and 9.1%, respectively. Annual expense ratio of 0.99% is lower than the category average of 1.29%. FREEX has a Zacks Mutual Fund Rank #2.

Neuberger Berman Real Estate A (NREAX - Free Report) seeks total return. NREAX invests a major portion of its assets in equity securities issued by real estate investment trusts and other securities issued by other real estate companies.

NREAX’s 3-year and 5-year annualized returns are 6% and 7.4%, respectively. Annual expense ratio of 1.21% is lower than the category average of 1.29%. NREAX has a Zacks Mutual Fund Rank #2.

PIMCO Real Estate Real Return Strategy A (PETAX - Free Report) seeks maximum real return. PETAX seeks to achieve its investment objective by investing in real estate-linked derivative instruments.

PETAX’s 3-year and 5-year annualized returns are 4.3% and 11.6%, respectively. Annual expense ratio of 1.14% is lower than the category average of 1.29%. PETAX has a Zacks Mutual Fund Rank #2.

Davis Real Estate A (RPFRX - Free Report) seeks total return. RPFRX invests the majority of its assets in securities issued by companies principally engaged in the real estate industry.

RPFRX’s 3-year and 5-year annualized returns are 6.6% and 7.9%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.29%. RPFRX has a Zacks Mutual Fund Rank #1.

T. Rowe Price Real Estate (TRREX - Free Report) seeks long-term growth. TRREX invests a large portion of its assets including borrowings for investment purposes in the equity securities of real estate companies.

TRREX’s 3-year and 5-year annualized returns are 9.1% and 9.4%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.29%. TRREX has a Zacks Mutual Fund Rank #1.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.



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