Market Sector Update
- Leasing trends for commercial real estate appear to be tracking with the steady job creation the U.S. Real estate investment trust (REIT) management teams that we have met with suggest the strength in local markets should continue. Generally, the strength in demand is beginning to push rental rates upward.
- While some new construction is occurring in the apartment and warehouse sectors, it is quite minimal relative to the existing stock of real estate. We continue to hold a cautionary stance as we see weakness in Europe, as well as concerns domestically about quantitative easing and government budgets.
- The growing strength of the domestic economy and increased availability of low cost capital to the commercial real estate industry has led to strong year-todate market performance. Notably, the small- and mid-capitalization REITs generated significant performance in the first quarter.
- In terms of sector performance, defensive REIT sectors such as net lease and health care were once again among the top performers.
- The strengthening economy and fundamental improvement in occupancy and rental rates leads us to greater confidence in REITs’ future earnings.
- Fund flow remains positive for domestic REITs and equities overall. This positive tone has allowed us to broaden the scope of companies in the portfolio, with additions to cell tower companies, timber REITs, homebuilders and some smaller-capitalization companies.
- We have seen some large-capitalization REITs fall to attractive valuation levels, and have begun to accumulate shares in these high-quality names. Generally, investors have been seeking opportunities to invest in hard assets that generate income—making REITs attractive investments.
- Barring any external shocks, we believe the domestic real estate economy should continue to produce fundamental improvement in the near term.
- REITs will most likely use their low-cost capital advantage to continue to buy accretively and to develop new property. Supply of new real estate should be kept in check.
- While REITs are trading at the upper end of the range of cash flow multiples and modest premiums to underlying assets, options exist in certain markets and within individual companies for strong valuation opportunities. Strength in leasing and rental rate growth will be necessary to drive these stocks further.
- The near term will be a stock picker's market, with a focus on rigorous valuation disciplines. While continued funds flow should enhance these opportunities, we expect that the quality companies with better balance sheets should regain their strength in performance.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.
Risk Factors. As with any mutual fund, the value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income f uctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25 percent of its total assets in the l real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. These and other risks are more fully described in the Fund prospectus.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.