The scale of U.S. stocks held by domestic investors has exceeded 150 trillion won. However, global investment banks (IB) are advising on a balanced strategy between large-cap and small-cap stocks due to the risk factors associated with the concentration of large-cap stocks. How much do we know about U.S. small-cap stocks? Based on recommendations from domestic and international investment experts, we have prepared a series for those who only know Nvidia and Apple when it comes to U.S. stocks. However, this is not a stock recommendation; it is merely an introduction to corporations. If you are interested in a corporation, please study it further and decide on buying or selling. We encourage all retail investors to see as much as they know.[Editor’s note]
Expectations for a reduction in U.S. interest rates continue to diminish, and most listed Real Estate Investment Trusts (REITs) are experiencing adjustments in the U.S. stock market. REITs, which are products for indirect investment in real estate, typically perform better during interest rate declines.
However, the price movements of individual REIT stocks vary. Experts advise that each REIT should be evaluated based on the growth potential of its core assets before investing. With significant policy changes expected in the U.S. following the second term of Donald Trump's administration, it is important to scrutinize what assets the REITs are investing in.
The stock price of Innovative Industrial Properties (IIPR), listed on the New York Stock Exchange, exceeded $130 until November last year, but has halved to around $60 in the past two months. The sharp decline in stock prices occurred due to the so-called 'Red Sweep' effect after the Republican victories in last November's U.S. presidential and congressional elections.
IIPR is a REIT specialized in the cannabis industry, owning 105 cannabis cultivation and production facilities across 19 states, from California to Massachusetts, covering 7.5 million square feet (approximately 210,000 pyeong). The core assets of IIPR are 98% cannabis cultivation and production facilities, and its main business is leasing them to those who have received state government approval.
The legalization of 'marijuana' was a hot issue in the U.S. presidential election. The President-elect Trump hinted at a favorable stance on marijuana legalization during his campaign, considering the voter sentiment. However, since the President-elect has traditionally advocated for strict punishment against drug trafficking, the prevailing view is that the cannabis industry will be stifled. Consequently, after Trump won the election, IIPR's stock price also dropped.
REITs that invest in office buildings and dwellings are also underperforming. Office REITs have not recovered from their downturn since the COVID-19 pandemic. According to international credit rating agency Moody's, the U.S. office vacancy rate, which was over 16% before the pandemic, surpassed 20% last year. There are also projections that the vacancy rate could rise to 25% as long-term lease contracts expire.
American Homes 4 Rent (AMH), a housing REIT that owns 60,000 single-family homes in 21 U.S. states, saw its upward momentum stop due to expectations for a moderation in interest rate cuts. Despite hopes for a construction industry stimulus package from the new administration, rising interest rates have hindered stock price growth. REITs that raise funds to invest in real estate see their profitability decrease when interest rates rise.
In contrast, driven by the artificial intelligence (AI) boom, data center REITs are experiencing a prosperous period. Equinix (EQIX), the world's largest data center REIT included in the S&P 500 index, and Digital Realty Trust (DLR), which operates data center infrastructure in major cities across over 50 countries, are performing the best among REITs. Notably, Equinix's stock price rose even during the fourth quarter (October-December) of last year, when U.S. interest rates rebounded. Since President Trump was elected, the stock price has increased by 6%.
As U.S. retail sales perform well, some retail REITs are also holding up. Regency Centers (REG), a listed REIT with over 80% of its core assets being retail stores (marts), has maintained its stock price in the $70 range since August last year.
However, the stock prices of Tanger (SKT), which invests in outlet assets, and National Retail Properties (NNN), which leases real estate to tenants operating convenience stores and restaurants, have significantly declined. This is interpreted as a result of the growing e-commerce market and increasing consumption gaps based on income levels, leading to mixed profitability prospects within retail REITs.
Given the importance of funding for REITs, the greatest variable remains interest rates. The S&P U.S. All Equity REIT Index, which tracks the stock prices of U.S. listed REITs, has fallen over 10% from its peak of 171.36 in September last year when the Federal Reserve (Fed) initiated a 'big cut' (a 0.5 percentage point reduction in interest rates), significantly influenced by declining expectations for interest rate cuts.
As significant policy changes are anticipated under the second Trump administration, the trend of 'picking the wheat from the chaff' in REITs is expected to continue. The National Association of Real Estate Investment Trusts (Nareit) noted that there are risks associated with the rise in interest rates and changes in tariff policies reflecting fiscal imbalances this year, stating, "If commercial real estate transactions increase during a phase of economic growth in the U.S., REITs may find growth opportunities."