Can REITs thrive amid high inflation? (2024)

FAQs

Can REITs thrive amid high inflation? ›

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.”

Historically, REITs are one of the better-performing sectors during inflationary periods. We can see this in the following image. You'll notice REITs are in the upper right area, showing they are outperformers during periods of high inflation. In contrast, check where mortgage REITs are in the bottom left.

REITs historically perform well during and after recessions | Pensions & Investments.

Analyst Kevin Brown says Welltower and other leading REITs are trading at significant discounts to fair value following two years of rising interest rates. Brown says Welltower and other top health care REITs are well positioned to continue to capitalize on the Affordable Care Act.

Several asset classes perform well in inflationary environments. Tangible assets, like real estate and commodities, have historically been seen as inflation hedges. Some specialized securities can maintain a portfolio's buying power, including certain sector stocks, inflation-indexed bonds, and securitized debt.

More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.

Real estate usually performs well in inflationary climates; REITs are the most feasible way to invest. Adding global stocks or bonds to your portfolio also hedges your portfolio against domestic inflationary cycles. Another option is more exotic debt instruments like TIPS (inflation-adjusted Treasury bonds).

This is known as the geographic market test. Section 856 (d)(2) (C) excludes impermissible tenant service income (ITSI) from the definition of rent from real property, making it “bad income” for the 75% and 95% REIT gross income tests.

There have been very few REIT bankruptcies over the past 50+ years.

Are REITs worth it in 2024? ›

In one instance, both US REITs and the S&P 500 exhibited nearly identical performances, while in only two instances the S&P 500 outperformed US REITs. Considering their past performance, analysts have presented a positive outlook for the REIT sector in 2024.

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.

The REIT sector had a rough start to 2024 with a -5.72% total return in January. Large cap REITs (-4.79%) outperformed their smaller peers in January. Micro cap REITs (-8.39%) averaged the steepest declines. Only 9.55% of REIT securities had a positive total return in January.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

All else being equal, higher interest rates tend to decrease the value of properties and increase REIT borrowing costs.

According to expert panelists at the recent Nareit REITworld annual conference, 2024 could be a year of opportunity for Real Estate Investment Trusts (REITs). They added a note of caution, however, that there are still headwinds affecting investor perspectives on REITs and capital markets in general.

During the past 25 years, REITs have delivered an 11.4% annual return, crushing the S&P 500's 7.6% annualized total return in the same period. Image source: Getty Images. One reason for REITs' outperformance is their dividends.