Rising rates heighten appeal of real estate debt securities

  • The U.S. Federal Reserve's ongoing campaign to increase interest rates in an effort to ease high inflation has resulted in new appeal for real estate corporate bonds and commercial mortgage-backed securities, according to Fidelity's Bill Maclay.
  • "Higher base rates plus historically wide credit spreads have resulted in an attractive setup for real estate debt, with high all-in yields on investment-grade-rated real estate corporate bonds and CMBS," says Maclay, portfolio manager of Fidelity Advisor® Real Estate Income Fund.
  • In managing the fund since 2019, Maclay has sought above-average income and capital growth by investing in a mix of commercial real estate security types, including common stock, preferred stock, corporate bonds, and CMBS.
  • Maclay says floating-rate CMBS is particularly appealing. Because the coupon income on these instruments is tied to short-term interest rates, these securities, which are secured by mortgages on commercial real estate, benefit when the Fed raises its benchmark interest rate.
  • He notes that some of the fund's floating-rate bond holdings offer generous yields on either side of 10%, as of May 31, providing income that supports the fund's total return.
  • Another compelling opportunity, Maclay says, is the ability to have exposure to commercial real estate property types that continue to experience consistent rent growth and are benefiting from both business and demographic tailwinds. These types of commercial real estate include warehouses, self-storage, manufactured housing, and apartments.
  • "While office buildings are facing a challenging backdrop, there are plenty of other areas within commercial real estate that are seeing strong demand drivers," Maclay says. "Our focus is on segments with structural tailwinds, such as warehouse buildings."
  • Maclay says his confidence in uncovering attractive values in this specialized market is due to Fidelity's dedicated real estate debt research team, which has more than two decades of experience analyzing these complex asset types.
  • "Our research includes not only studying financial statements, but also in-person visits to properties as to get a better handle on the investments we own or might consider owning," he says. "Further, because Fidelity is such a large player in the CMBS market, we have wider access to available investment opportunities than many other firms, giving us increased opportunity to select CMBS that best meet our investment objectives."
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.

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