What is the future of REITs?
Analysts and talk show hosts may be bullish on REITs at the start of 2024, but it's necessary to address some drawbacks and potential downsides. Like any stock, the price of a REIT can roller coaster up and down with the market. While threats of a looming recession are fading, the market is always unpredictable.
Analysts and talk show hosts may be bullish on REITs at the start of 2024, but it's necessary to address some drawbacks and potential downsides. Like any stock, the price of a REIT can roller coaster up and down with the market. While threats of a looming recession are fading, the market is always unpredictable.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
The FTSE NAREIT All REIT Index rose 11.92% in November and 8.17% through Dec 26, outperforming the S&P 500's rise of 9.13% and 4.18%, respectively. As economic activity rebounds are in full swing, the REIT industry seems well-poised for a recovery in the coming year.
REIT Market Outlook and Forecast
The REIT market is projected to see 2.6% year-over-year growth in 2023. The REIT market is forecast to grow at a CAGR of 2.8% from 2022 to 2027. The market size is estimated to increase by $333.01 billion from 2022 to 2027.
Investing in REITs can add some diversification to your portfolio and give you access to passive income, liquidity and excellent long-term returns. However, taxes can be more expensive with REITs compared to other investment options, and there are still risks involved with the real estate market.
REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower risk bonds.
REIT Stock Performance and the Interest Rate Environment
REIT share prices, like the broader stock market, often react to changes in the outlook for interest rates, including both the short-term rates set by the Federal Reserve and the long-term rates that are governed more by market forces.
There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to. However, if an investor buys a non-traded or private REIT, the investment should be considered illiquid.
| # | Name | C. |
|---|---|---|
| 1 | Prologis 1PLD | 🇺🇸 |
| 2 | American Tower 2AMT | 🇺🇸 |
| 3 | Equinix 3EQIX | 🇺🇸 |
| 4 | Simon Property Group 4SPG | 🇺🇸 |
Why not to buy REITs?
In most cases, REITs utilize a combination of debt and equity to purchase a property. As such, they are more sensitive than other asset classes to changes in interest rates., particularly those that use variable rate debt. When interest rates rise, REITs share prices can be prone to volatility.
What this means is that REITs are ideal borrowers for banks. They are exactly who they want to do business with because they know that the risk of a REIT bankruptcy is extremely low. Just look at the past. There have been very few REIT bankruptcies over the past 50+ years.
Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.
In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023. Based on historical experience, the convergence of the wide valuation gap between public and private real estate will likely ensure continued REIT outperformance into 2024.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
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.
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
However, bonds and REITs are very different, both in terms of their advantages and disadvantages. REITs are a form of equity (stock) that should continue enjoying total returns that are superior to bond returns over time while also doling out higher amounts of current income.
They may also implement periodic monitoring systems and audits to ensure continued adherence to energy efficiency criteria and set goals to further reduce resource consumption. Through these practices, REITs are becoming increasingly sustainable investment alternatives, as demonstrated by statistics.
Is REIT better than mutual funds?
Mutual Funds vs REITs: The choice of investing completely depends on an individual's investment goals, risk tolerance, and personal preferences. In the case of Mutual Funds, the risks minimize over a long period, but REIT investments come with no such guarantee.
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.
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.
REITs with business interests in defensive industries can be attractive recession investments. Dec. 9, 2022, at 4:07 p.m. REITs that operate in the health care or infrastructure sectors might be more durable thanks to the evergreen nature of their tenants.
However, an examination of the historical record suggests that this is a misconception. Although interest rates certainly affect real estate values and, therefore, the performance of REITs, rising interest rates do not necessarily lead to poor returns.
