When should I invest in REITs?
But historically, the best entry points for listed REITs have been during early cycle recoveries. And the very best returns come when you transition between a recession and early cycle, when REITs have historically delivered next 12-month returns of more than 20%.
But historically, the best entry points for listed REITs have been during early cycle recoveries. And the very best returns come when you transition between a recession and early cycle, when REITs have historically delivered next 12-month returns of more than 20%.
However, our review of REIT balance sheets and debt suggests that REITs are well-positioned for economic uncertainty in 2023 because of their strong balance sheets. They are entering the new year with leverage near historical lows, and well-termed, mostly fixed-rate debt and very low current interest expense.
For most of 2023, persistent macroeconomic uncertainties and a high interest rate environment kept the performance of the real estate investment trust (REITs) industry under pressure. However, the Fed's latest decision to keep interest rates steady and an indication of three rate cuts in 2024 cheered REIT investors.
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.
This is the biggest and most important mistake that REIT investors keep on making. They see REITs as "income vehicles" and therefore, they will select their investments based on their dividend yield. In their mind, the higher the better. But in reality, the dividend is just a capital allocation decision.
Research shows that REITs returns have generally been positive and have often outperformed the S&P 500 in periods of rising interest rates.
REITs have typically enjoyed strong absolute and relative total return performances after monetary policy tightening cycles end. The valuation divergence between REITs and private real estate will likely converge in 2024, making REITs an attractive option for investors.
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.
Answer: Because REIT prices are forward-looking and front-run future pain, while the market prices of real estate properties themselves lag real-time increases in interest rates and economic weakness.
Does Warren Buffett invest in REITs?
While real estate has never been a big part of Buffett's investing strategy, Berkshire Hathaway has owned shares of STORE Capital, a REIT focused on single-tenant operational real estate.
The FTSE Nareit All Equity index, consisting of REITs that exclude mortgages, generated a 15.9% annualized return during recessions and 22.7% in the year following the end of a downturn, according to the National Association of Real Estate Investment Trusts.
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.
Investors can benefit from allocating as little as 5% to REITs. Investor confidence in real estate reached unprecedented levels in 2022, owing to home price appreciation and higher yields for other asset classes, such as REITs, in low-rate environments.
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.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
REITs should generally be considered long-term investments
In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.
According to the data, REITs have outperformed stocks over the long term, delivering an 11.9% average annual return from 1972 to 2021 (compared to 10.7% for the S&P 500). At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years.
| Symbol | Company | REIT performance (1-year total return) |
|---|---|---|
| AOMR | Angel Oak Mortgage Inc. | 60.92% |
| SKT | Tanger Outlets | 55.01% |
| MDV | Modiv Industrial Inc. | 44.80% |
| SEVN | Seven Hills Realty Trust | 41.52% |
When rates rise, REITs fall. At least that's the conventional wisdom. In recessions, interest rates fall. Normally bullish for REITs—consider them a “second-level” bet on a bond bounce.
What happens to REITs when interest rates go down?
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
Share prices for US real estate investment trust stocks jumped in the fourth quarter of 2023, outperforming the broader market. The Dow Jones Equity All REIT Index closed the quarter with a 17.9% total return, while the S&P 500 logged an 11.7% return for the quarter.
1. Federal Realty: The king. Federal Realty has increased its dividend annually for 54 consecutive years, which it claims (and there's no reason to doubt it) is the longest streak of any publicly traded real estate investment trust (REIT).
Performance-wise, REITs offer attractive risk-adjusted returns and stable cash flow. Also, a real estate presence can be good for a portfolio because it provides diversification and dividend-based income—and the dividends are often higher than you can achieve with other investments.
As a result, the real estate industry is also becoming more sustainable, including real estate investment trusts, or REITs. These companies own, operate or invest in income-generating real estate, such as residential real estate, aparthotels, medical facilities and warehouses.
