Residential Sector: What Investors Should Know
Overview of residential REITs
The residential REIT sector mainly includes apartments and manufactured housing. It’s one of the largest segments in the REIT industry. It accounts for around 12.60% of the total REITs market capitalization.
Apartments’ earning sources
Apartment REITs earn income by renting apartments. The average lease period for apartments is normally one year. This means that apartment REITs have to renew rent contracts every year at a prevailing rate. In a period of rising rates, this is favorable for a company and vice versa. In the US, there are more than 17.5 million apartment units with a median rental income of ~$680 per month per unit.
Factors impacting apartment REITs
Employment conditions directly impact REITs’ rental revenue. As a result, employment conditions are the main driver of apartment REITs. Another factor that affects rental revenue is the price of an apartment. When home prices are very high, renting a property becomes more attractive and vice versa. In addition, when mortgage rates are high, the demand for apartment rentals increases. Most apartment owners try to maintain more than 90% occupancy. Other factors that affect apartment REITs are the supply of apartment inventory and rental housing supply.
Largest apartment REITs
There are 19 apartment REITs with a combined market capitalization of $104 billion. They comprise around 11.70% of the total REITs market capitalization. The largest apartment REIT is Equity Residential (EQR) with a market capitalization of $26.5 billion. It’s followed by AvalonBay Communities (AVB) with $20.9 billion and Essex Prop Trust (ESS) with $13.9 billion. The average dividend yield of apartment REITs was 4.40% as of June 2015.
Manufactured housing or mobile home companies own, operate, and develop manufactured housing and recreational vehicle communities. Manufactured home REITs earn income by renting the homes to tenants. There are only three REITs in this sub-sector with a combined market capitalization of $7.95 billion. Equity Lifestyle Properties (ELS) is the largest. It has a market capitalization of $4.4 billion followed by Sun Communities (SUI) with $3.3 billion.
Investors looking for diversification in the REIT sector can get exposure to REIT ETFs like the Vanguard REIT ETF (VNQ), the iShares U.S. Real Estate ETF (IYR), and the iShares Cohen & Steers REIT ETF (ICF).