Will REITs bounce back?
Historically, they have enjoyed a resurgence in total returns after monetary policy tightening cycles end. In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023.
Right now, REITs (VNQ) are at an inflection point and time is running out for investors. But now as we head into 2024, we expect the polar opposite and this should lead to an epic recovery across the REIT sector. The Fed expects at least 3 interest rate cuts in 2024 and the market is predicting even more.
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.
With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year. Ultimately, the decision on whether or not to buy REITs will depend on the specific circ*mstances and risk tolerance of each investor.
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.
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.
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.
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
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.
Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.
Are REITs more risky than stocks?
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.
After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.
Because REITs use debt to purchase investments, rising interest rates could mean these companies would have to pay more interest on future loans. This could in turn reduce their return on investment. Because of this, REITs could potentially lose value when interest rates rise.
He and Charlie Munger, vice-chairman of Berkshire Hathaway, actively dismissed it for many years. However, Buffett has recently invested in REITs as part of his passive income strategy.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
The overall business performance of the S-REIT sector has been lacklustre and some segments of the industry have not been able to recover to pre-COVID levels, either due to a change in business dynamics or due to an inflationary environment. Office REITs have faced challenges due to the new work-from-home (WFH) trends.
It is generally accurate to say that individual Real Estate Investment Trusts (REITs) are less likely to go to zero compared to individual stocks, primarily because REITs are invested in real estate properties and real estate typically retains some non-zero value.
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.
Because the REIT manages the property, investors are not burdened with the everyday stress of vacancies, tenants, management or repairs. REITs also pay out dividends to investors, providing a reliable passive income stream.
The portfolio was much more resilient in the tough markets, particularly in 2022 and 2023. In both years, the REIT+ (100% REITs) portfolio outperformed the benchmark by 1.7% in 2022 and 1.5% in 2023 YTD.
What is the lifespan of a REIT?
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.
All else being equal, higher interest rates tend to decrease the value of properties and increase REIT borrowing costs.
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
REITs tend to be popular among income investors because they're required to distribute at least 90 percent of their taxable income as dividends to shareholders. So, for investors, there are two ways to make money from REITs: Appreciation when the REIT's share price goes up and regular quarterly dividend payouts.
Since last year, experts have predicted that a rebound in commercial real estate is just around the corner. Earlier this year, CBRE Group (CBRE -2.69%), the world's largest commercial real estate company, said it expected a rebound in the industry by the end of 2023.
