What is it?
The real estate & construction sector encompasses companies involved in the sale, development, or improvement of land and buildings for retail or commercial purposes. Companies can range from real estate agencies and investment funds to construction material producers.
Why is it important?
In terms of size, the real estate & construction sector only represents 2.97% of the US economy, but makes up an important part of the average investment portfolio. The health of the real estate sector has a large influence on consumer spending, because it directly impacts the wealth and disposable income of all property owners. Lower property prices drive consumption and investment, while higher property prices put downward pressure on incomes. The construction component of this sector is also a vital source of employment, which fuels the global labour market.
- Real Estate: American Tower, Simon Property Group, Crown Castle International, Prologis
- Construction: Fluor Corp, Kier Group, Interserve
- S&P 500 Real Estate
- iShares US Home Construction
- Invesco Dynamic Building & Construction
- SPDR S&P Homebuilders
When does it do well/badly?
The real estate and construction sector is cyclical, which means it outperforms when the economy does well and underperforms when the economy is doing badly. In times of prosperity, investors will have lots of cash to buy or improve on their property, which boosts the sector. Given the capital intensive nature of the sector, it is also sensitive to interest rates. Lower interest rates gives buyers and developers access to more funding for purchases and development projects, but higher interest rates cripple buying power within the industry.
Why should I invest?
Property forms an important component of any diversified portfolio, whether it comes in the form of tangible property assets or house or investments in property stocks/funds. Property is often a useful baseline investment for any portfolio because it is generally considered to be a lower-risk sector than other industries, such as technology. Property is an excellent long term investment and brings a stable cash flow in the form of rental income, which is useful when there is a high degree of uncertainty in markets.