Do REITs go down in value?
For example, Realty Income (NYSE:O) had a beta of 0.5. A beta of 0.5 implies this REIT is half as volatile as the S&P 500, so if the S&P 500 slumps 10%, this REIT should only decline in value by 5%. Because of their lower volatility, REIT returns are less correlated with the stock market.
In snakebit 2022, REITs were down 25.9%, worse than the S&P 500, off 19.5%. Trusts focused on offices are the worst off. In 2023 through November, according to industry group Nareit, office REITs lost 14.7%; in 2022, they were down 38%.
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.
Interest rates remain high. The other factors driving the commercial real estate crisis, like falling demand for office space due to remote working, persist. On top of these macro factors, many REITs are even contending with their own tenant-related headwinds.
Real estate investment trusts (Reits) around the world are dealing with several crises all at once. After almost 15 years of 'free money' from ultra-low interest rates, higher interest rates have been causing problems everywhere.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
REITs historically perform well during and after recessions | Pensions & Investments.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.
REIT Stock Performance and the Interest Rate Environment
Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals.
What is the downside of REITs?
Here are some of the main disadvantages of investing in a REIT. Market volatility: Value can fluctuate based on economic and market conditions. Interest rate risk: Changes in interest rates can affect the value of a REIT.
Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.
Key Points. REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
REITs should generally be considered long-term investments
This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.
As we dive into 2024, the Fed's accommodative approach to tackling inflation is likely to provide an impetus to the REIT sector, which depends highly on the debt market to carry out business activities. These companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations.
Real estate stocks have been a bust so far in 2024. The rate-sensitive sector has underperformed the broader stock market this month as investors worry the Federal Reserve won't bring down the cost of borrowing as quickly as markets hope.
Summary. REITs have access to capital and are acquiring assets, making it a good time to invest. REITs historically rebound when interest rates pivot and have the potential for rent growth.
Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.
He says: “Our analysis shows REITs perform very well historically in periods of high inflation. I could easily see global REIT returns in the low double-digits over the next 12 months – and if the economic situation turns out to be more positive it could be considerably more than that.”
Do REITs have a lot of debt?
Do REITs Have High Leverage? In some cases, REITs use lots of debt to finance their holdings. Some trusts have low amounts of leverage. It depends on how it is financially structured and funded and what type of real estate the trust invests in.
The global REIT market is experiencing steady growth. According to the recent market reports, the market size is reaching an impressive $3.5 trillion in 2022 and is estimated to reach USD 4.2 trillion by 2027, growing at a Compound Annual Growth Rate (CAGR) of 2.8% from 2022.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years. If you invested more money into REITs or those producing a higher average annual return, you could become a millionaire even faster.
Whereas publicly traded REITs allow you to sell shares instantly whenever the market is open, the same isn't true for private REITs. Each company has its own rules when it comes to redemption of shares, and these can be very restrictive.
