- Jeff Kolitch has returned 446% to investors via the $1.1 billion Baron Real Estate Fund since 2009.
- The 29-year veteran investor breaks down the four trends driving the real-estate market in 2021.
- He also shares 11 “attractively valued” real-estate stocks and their upside potential.
- Visit the Business section of Insider for more stories.
After almost a year of lockdowns in the US, Jeff Kolitch still thinks the real-estate sector is set to reap attractive gains in 2021 — and it’s not just because he is at the helm of two outperforming funds.
Kolitch manages the $1.1 billion Baron Real Estate Fund, which beat 99% of its category peers last year to generate a 43.85% return and has cumulatively gained 446% since its inception at the end of 2009. He also runs the $47.2 million Baron Real Estate Income fund, which ended up in the third percentile last year and returned 22.3%, according to Morningstar data.
But this level of outperformance might be hard to sustain in the year ahead, Kolitch said in a recent client note.
“We believed the dramatic correction presented a once-in-a-generation buying opportunity,” he said of the real-estate market plunge incurred by the COVID-19 pandemic. “After the pullback, we had the double barrel of monetary and fiscal stimulus coupled with attractive equity valuations. We saw signs that real estate was starting to rebound after a short drawdown.”
Given such unprecedented market conditions, Kolitch said he implemented a more aggressive playbook than usual by raising cash and deploying them toward “best-in-class, growth-oriented companies that rarely are on sale,” as well as “cyclical stocks in the bullseye of the pandemic such as hospitality-related and housing-related names.”
Today, with many stocks up significantly from their March lows, Kolitch says that a lot of buying opportunities have passed, as have the negative headwinds that faced the sector last year.
Many of the pandemic-related real-estate segments such as hotels, casinos, offices, and malls were decimated in 2020, with the real-estate investment trust index down 9% on the year, while the S&P 500 and Nasdaq returned 18% and 45%, respectively.
On top of that, as the economy reopens amid the vaccine rollout, Kolitch says real estate will not only become one of the key beneficiaries but also embark on a new cycle and multiyear recovery.
As a result, even though bargains are harder to find in this new environment, real-estate stocks are still on sale and relatively cheap compared with the broad stock market, bonds, fixed-income alternatives, and private real estate.
In 2021, Kolitch is taking a barbell approach to investing in the real-estate sector, where he has identified four key themes to track compelling opportunities.
1. COVID-19 recovery beneficiaries
These stocks represent businesses that were forced to shut down during the pandemic but are expected to recover as the economy reopens. They include hotels, timeshare companies, amusement-park companies, land-development companies, and certain real-estate-operating companies, as well as office, apartment, healthcare, and gaming REITs.
2. Residential real estate
Kolitch is bullish on residential real estate propelled by “low inventory levels relative to demographic needs, pent-up demand, historically low mortgage rates, and perhaps a rebound in job and economic growth.” He is particularly focused on homebuilders, single-family rental REITs, manufactured-housing REITs, residential building product and service companies.
3. Intersection of technology and real estate
As software continues to eat the world, adjacent technologies such as cloud computing and wireless infrastructure have also seeped into the real-estate market. Kolitch says the best way to capitalize on the growth is through investing in data centers, tower companies, industrial logistics companies, and real-estate data-analytic companies.
4. Niche REITs
As opposed to traditional REITs, unconventional REITs with exposure to sectors experiencing long-term demand have the potential to grow faster. Examples include life-science REITs that could benefit from more funding for drug development, cold-storage REITs exposed to the growth of e-grocery, and single-family rental REITs capturing the shifting consumer preference for renting over buying.
In addition to laying out the four trends, Kolitch also shared what he said were 11 “attractively valued” real-estate companies.
These 11 stocks, which include dividend-paying REITs and undervalued real-estate-operating companies, are listed below, along with their tickers, market caps, and manager commentaries.