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Some investors remain cautious about getting back into the real estate sector.

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The coronavirus outbreak and economic shutdown have made it tough for real estate across all sectors, but that hasn’t stopped real estate investment trust (REIT) exchange-traded funds (ETFs) from rising in recent weeks.

While a modest recovery appears to be under way, alongside the broader markets, some investors are cautious about getting into the real estate sector right now – particularly office and commercial properties that are expected to feel long-term effects from COVID-19 lockdowns that shuttered restaurants and retailers and emptied office buildings. The only areas getting a boost from the pandemic are data-centre, industrial and warehouse real estate as more personal and business activity takes place online.

REIT ETFs listed on the Toronto Stock Exchange dropped dramatically in mid-March – with several down as much as 20 per cent in the past three months – after governments across Canada told businesses to close and people to stay home. As more economies slowly begin to reopen, investors have become more positive on REIT ETFs.

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The benchmark iShares S&P/TSX Capped REIT ETF (XRE-T), the oldest REIT ETF in Canada with $1.1-billion in assets under management (AUM), is down about 18 per cent year-to-date but up by about 8 per cent in the past month. (All data from Morningstar as of June 9.)

Michelle Wearing, an associate portfolio manager with Starlight Capital, says REITs in both Canada and the U.S. have performed well in the past week or so due largely to better-than-expected economic data such as Purchasing Managers’ Indexes, auto sales and employment.

Recent gains reflect some “optimism of a recovery,” Ms. Wearing says, “largely with the names and sectors that have underperformed,” such as malls, seniors housing, diversified and hotels.

Still, Ms. Wearing and other investors remain cautious about the sector moving forward, recommending investors remain selective about where they invest.

“It’s been a stock picker’s market,” Ms. Wearing says, while recommending investors do their due diligence and know exactly what’s included in any REIT ETF.

She suggests investors look at niche areas of the real estate market to find growth, including industrial, data centres and wireless towers.

The pandemic has accelerated the shift to online activity for personal and business needs, which means a greater need for warehouses to store goods, data centres to process transactions and wireless towers to receive signals.

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“It’s going to become more and more prevalent,” Ms. Wearing says of online activity.

Ms. Wearing helps manage the Starlight Capital Global Real Estate Fund ETF (SCGR-NE), which has significant holdings in data-centre REITs with no exposure to retail, seniors’ residences or hotels, all of which have been affected by the pandemic. The ETF, which has about $7.8-million in AUM and an MER of 1.33 per cent, has fallen by about 8 per cent year-to-date and is up by about 2 per cent in the past month.

An example of another industrial REIT ETF is the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS-A), which focuses on U.S. companies in the industrial real estate sector, including logistics, distribution and self-storage facilities. It has about US$60-million in AUM, an MER of 0.60 per cent and has fallen by about 0.40 per cent year-to-date and about 9 per cent over the past month.

There’s also the Pacer Benchmark Data and Infrastructure Real Estate SCTR ETF (SRVR-A), which tracks the Benchmark Data and Infrastructure Real Estate SCTR Index and invests in companies and REITs that own U.S. data and infrastructure real estate. It has about US$709-million in AUM, an MER of 0.60 per cent and has returned about 10.5 per cent year-to-date and 6 per cent over the past month.

David Kletz, vice-president and portfolio manager with Forstrong Global Asset Management, says SRVR not only avoids the current issues with commercial real estate, “but more importantly … aligns with a positive secular trend, and that is the continual expansion of cloud computing and one of the major ones is the rollout of 5G [wireless networks], which is going to be an extremely pivotal development.”

Mixing real estate with a growing technology trend “makes it a really compelling longer-term story,” Mr. Kletz adds, while recommending investors stay away from retail, commercial and office real estate entirely.

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For investors who want a more broad-based ETF with a focus on residential real estate, Mr. Kletz suggests the iShares Residential Real Estate Capped ETF (REZ-A), which invests in the U.S. residential real estate sector. REZ has about US$376-million in AUM, an MER of 0.48 per cent and has dropped by about 11 per cent year-to-date and risen about 14 per cent over the past month. Some of REZ’s top holdings include Public Storage REIT, Invitation Homes Inc. and Sun Communities REIT.

While many Canadian-focused REITs are in the red so far this year, one that has outperformed its peers is the TD Active Global Real Estate Equity ETF (TGRE-T), launched in November. It has about $132-million in AUM, an MER of 0.66 per cent, is up 1 per cent year-to-date and has increased by about 6 per cent over the past month.

TGRE has done better given its heavy weighting of specialty REITs with stakes in telecom towers, advertising spaces and timberland properties, according to Ian Tam, director of investment research for Canada at Morningstar.

He notes TGRE’s top three holdings at the end of May were American Tower Corp., Crown Castle International Corp. and Equinix Inc. – all of which saw double-digit gains in the past year and year to date. The ETF was underweight on retail REITs, which have underperformed, he adds.

“By the numbers, the fund had 16-per-cent more exposure to specialty REITs compared against the category and 8-per-cent underexposure to retail REITs compared against the category,” Mr. Tam says. “I would certainly chalk this outperformance up to being in the right industry.”

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