NEW YORK ( TheStreet) -- Real estate stocks, excluding real estate investment trusts, are at the beginning of a powerful rebound, says Jeff Kolitch, manager of the Baron Real Estate Fund (BREFX). He favors Hyatt (H - Get Report) and Starwood (HOT - Get Report).
The mutual fund has returned 8% this year, better than 82% of its Morningstar peers. Over the past year, the fund has risen 23%, putting it in Morningstar's 8th percentile for real estate funds.
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.
Real estate has had a tremendous run over the past year. What makes you think these stocks can go higher?
We are in the early stages of a multi-year recovery for both commercial and residential real estate. Demand trends are improving. Supply growth forecasts are very low. Cash flows are beginning to improve. And valuations are attractive across many sub-segments of real estate.
If that is the case, why are you underweight REIT stocks?
REITs are somewhat pricey at this stage. If you look at REIT valuations, including earnings and cash flow multiples, then you will see by historical standards they are expensive right now. And for that reason we have positioned our fund to be weighted more heavily in other areas of real estate that we think are more compelling at this time.
One real estate sector that you like quite a bit is senior-living operators like Brookdale(BKD - Get Report).
We believe senior-housing operators in the real estate landscape offer some of the most compelling valuations with some of the best growth prospects. The demographic trends in senior housing are very compelling. The senior population is growing at three times the rate of the overall population. Demand is beginning to pick up. Supply growth forecasts are very low at this stage and there are several different growth vehicles available to these companies.
You are also positive on hotel companies like Hyatt and Starwood. Is this a call on a pickup in business travel?
It's a call on both business travel and the transient consumer. We believe in the case of hotel C-Corporations that we are in the early stages of a very powerful recovery. If you look at supply growth over the past three years, it has grinded to a halt. In fact, commercial real estate supply growth, particularly in the hotel segment, is at its lowest point in 25 years. Demand has started to rebound both at the consumer and corporate level. Occupancy and rates are picking up as well, so it's an area that we also expect to be quite compelling for the next few years.