Real estate investment trusts (REITs) offer natural inflation protection. When prices rise, so do rentals and values in real estate. This helps REIT dividend growth and ensures a steady supply of income, especially during periods of high inflation.
In all but two of the last twenty years, REIT dividends have exceeded inflation as assessed by the Consumer Price Index.
Directly comparing REIT dividend growth with inflation is a practical technique to measure the inflation protection provided by REITs. Dividend growth in REITs have exceeded inflation in all but two of the last 20 years, as assessed by the Consumer Price Index.
Commodities and Treasury inflation-protected securities (TIPS) are examples of investments that can provide good inflation protection. Stocks, too, can play a role in a portfolio that shields investors from inflationary shocks.
Are REITs an inflation hedge?
Most REITs can be bought and sold on public exchanges much like stocks, making them extremely liquid investments. REITs aim to provide investors with a continuous stream of income as well as tax benefits. The corporation must follow regulations regarding the mix of its assets, the source and distribution of revenue, the number of shareholders and the concentration of shares, among other things, in order to qualify as a REIT.
REITs, like direct real estate investments, may have the potential to be effective inflation hedges. However, REITs, like direct ownership, are subject to risk and may lose value. As a result, each investor must examine their risk tolerance and select which hedges are acceptable and appropriate for them.
Do REITs fare well in times of inflation?
As seen in Chart 1, Chart 2 compares the performance of equities REITs and the S&P 500 across these three time periods. REITs beat the S&P 500 by 12.6 percentage points in 2021, a year with high inflation (7.0 percent or above), with an annual return of 41.3 percent vs 28.7 percent for the S&P 500. In instances of rising inflation, REITs tend to outperform, with robust income returns balancing falling REIT values. During these time periods, REITs outperformed the S&P 500 by 5.6 percentage points on average. REIT dividends more than compensated for the greater price returns on the S&P during periods of mild inflation (between 2.5 and 7.0 percent), resulting in total returns on REITs exceeding the S&P by 3.1 percentage points. When inflation is minimal (less than 2.5 percent), REIT returns lag behind the S&P 500 because the income element of the REIT does not compensate for the S&P 500’s superior price returns.
Are REITs a decent investment during a downturn?
Since 1991, U.S. REITs have outperformed the S&P 500 by more than 7% annually in late-cycle periods and have provided considerable downside protection in recessions, highlighting the potential value of conservative, lease-based revenues and high dividend yields in an uncertain environment (see chart below).
In 2021, are REITs a viable investment?
REITs provide investors with a number of advantages that make them an excellent addition to any investment portfolio. Competitive long-term performance, attractive income, liquidity, transparency, and diversification are just a few of them.
Competitive long-term performance
REITs have historically outperformed stocks, especially over lengthy periods of time. REITs, as assessed by the FTSE Nareit Composite Index, have generated a compound annual average total return (stock price appreciation plus dividend income) of 11.4 percent over the last 45 years. That’s only a smidgeon less than the S&P 500’s annual return of 11.5 percent over the same time period.
During various occasions, REITs have outperformed stocks. For example, during the last three, five, ten, fifteen, twenty, twenty-five, twenty-five, thirty, thirty-five, and forty years, they have outperformed small-cap equities as assessed by the Russell 2000 Index. Small-cap companies have only outperformed REITs once in the last year. Meanwhile, during the last 20 years, 25 years, and 30 years, REITs have outperformed large-cap equities (the Russell 1000 Index). Finally, they’ve outperformed bonds over the previous 40 years in every historical period.
Attractive income
The fact that most REITs pay attractive dividends is one of the reasons they have earned strong total returns over time. In mid-2021, for example, the average REIT yielded over 3%, more than double the dividend yield of the S&P 500. Over time, the income mounts up because it accounts for the majority of a REIT’s total return.
REITs pay high dividends because they are required to release 90% of their taxable income to comply with IRS laws. Most REITs, on the other hand, pay out more than 90% of their taxable income since their cash flows, as measured by funds from operations (FFO), are sometimes significantly greater than net income due to REITs’ proclivity for recording significant amounts of depreciation each year.
Many REITs have a strong track record of raising dividends over time. Federal Realty Investment Trust, for example, raised its dividend for the 53rd year in a row in 2021, the longest streak in the REIT business. Several other REITs have a long history of boosting their payouts at least once a year.
Liquidity
Real estate is an illiquid investment, which means that it is difficult to convert into cash. Consider the case of a single-family rental (SFR) property owner who needs to sell to finance a large expense. In that situation, they’d have to put the house on the market, wait for a suitable offer, and hope that nothing goes wrong on the way to closing. Depending on market conditions, it could take months before they can convert the property into cash. A real estate agent fee, as well as other closing costs, would almost certainly be required.
If a REIT investor needed money, on the other hand, they could click into their online brokerage account and sell REIT shares whenever the market was open. A REIT investor would also avoid paying commissions when selling because most brokers do not charge commissions.
Transparency
Many private real estate investments are run with little or no supervision. As a result, real estate sponsors may make judgments that aren’t necessarily in their investors’ best interests.
REITs, on the other hand, are quite transparent. The performance of REITs is monitored by independent directors, analysts, auditors, and the financial media. They must also file financial reports with the Securities and Exchange Commission (SEC). This oversight provides a layer of safety for REIT investors, ensuring that management teams are unable to take advantage of them for personal gain.
Diversification
REITs allow investors to diversify their portfolios throughout the commercial real estate industry, reducing their reliance on stock and bond markets. This diversification reduces an investor’s risk profile while not lowering rewards.
For example, with a Sharp Ratio of 0.27 and a standard deviation of 10, a typically balanced portfolio of 60% equities and 40% bonds has historically earned a bit higher than 7.8% return over the past 20 years. The Sharp Ratio compares risk to a risk-free investment, such as a US Treasury bond, with a higher number reflecting a better risk-adjusted return. The standard deviation, on the other hand, is a statistical measure of volatility, with a greater figure indicating a riskier investment. For the sake of comparison, a more aggressive strategy of 80 percent stocks and 20 percent bonds has historically produced around 8.3%, but with a Sharp Ratio of 0.17 and a standard deviation of more than 13.
- With a Sharp Ratio of 0.34 and a standard deviation of around 10.5, a 55 percent stock/35 percent bond/10 percent REIT portfolio has historically provided a yearly return of around 8.3 percent.
- A 40 percent stock/40 percent bond/20 percent REIT portfolio has historically had an annualized return of slightly more than 8.4%, with a Sharp Ratio of 0.46 and a standard deviation of less than 10.
- With a Sharp Ratio of 0.49 and a standard deviation of roughly 11.5, a 33.3 percent spread across stocks, bonds, and REITs has yielded an almost 9% average annual rate of return.
As a result, adding REITs to a portfolio should help it produce superior risk-adjusted returns by reducing volatility.
What exactly are inflation hedges?
- Inflation hedges are investments that safeguard investors from the depreciation of their money as a result of inflation.
- During inflationary cycles, the investments are expected to preserve or increase in value.
- Inflation hedging is a strategy used by investors to maintain the value of their investments while keeping operating costs low.
Is it true that REITs outperform the S&P 500?
The fourth quarter of 2021 saw US equity real estate investment trust share prices rise, outpacing the overall market. The Dow Jones Equity All REIT index returned 16.1 percent in the third quarter, compared to 11.0 percent for the S&P 500.
The Dow Jones Equity All REIT index returned 41.2 percent in 2021, while the S&P 500 returned 28.7 percent.
For the fourth quarter, all Dow Jones US real estate sector indexes saw positive returns.
Industrial REITs enjoyed the most growth, with the Dow Jones U.S. Real Estate Industrial index returning 30.0 percent for the quarter. The self-storage index came in second with a return of 28.2 percent, and the regional mall index came in third with a return of 22.5 percent.
The hotel index had the lowest return, at 1.6 percent, followed by the healthcare and office sector indices, which returned 5.3 percent and 8.8 percent, respectively.
REIT that invests in multifamily properties Bluerock Residential Growth REIT Inc. had the best quarterly return of all U.S. REITs with a market capitalization of more than $200 million, at 108.4 percent. Bluerock Residential’s stock soared more than 76 percent on Dec. 20, 2021, after it was announced that it would be acquired by Blackstone Inc. affiliates for $24.25 per share in an all-cash deal worth $3.6 billion.
Preferred Apartment Communities Inc. came in second, with a considerable increase in share price near the conclusion of the year. Preferred Apartment Communities’ stock rose 15% on the same day that the Bluerock Residential merger was announced, and continued to grow through the end of the year, ending the quarter with a 49.5 percent return.
Gladstone Land Corp., a farmland REIT, rounded out the top three REIT stocks with a total return of 49.0 percent in the most recent quarter, while industrial REITs Rexford Industrial Realty Inc. and Plymouth Industrial REIT Inc. came in second and third, respectively, with returns of 43.4 percent and 41.6 percent.
On the other hand, 21 REIT stocks finished the fourth quarter with negative returns.
Hotel REIT Ashford Hospitality Trust Inc. was in the bottom of the pack, with a negative 34.8 percent return for the quarter and a negative 62.9 percent return for the entire year of 2021. Despite its share price decline, Ashford Hospitality, like the rest of the hotel REIT sector, made progress in 2021 in recovering from the COVID-19 pandemic. Ashford Hospitality’s same-store occupancy increased to 62.8 percent in the third quarter, while same-store RevPAR increased to $97.59, its highest level since the fourth quarter of 2019. However, a rising COVID-19 case count due to the omicron form continues to be a source of concern for the hotel industry.
Timber REIT is a real estate investment trust that invests CatchMark Timber Trust Inc. was next, with a negative 25.9% return at the end of the quarter. Following its IPO, CatchMark’s stock price plummeted.
Is Warren Buffett a REIT Owner?
STORE Capital (STOR -2.56 percent ) is not just a stock in Berkshire Hathaway’s (BRK. A 0.83 percent )(BRK. B 0.70 percent ) stock portfolio, but it is also the only real estate investment trust (REIT) in which Warren Buffett’s conglomerate has invested its own money.
Which REITs are the safest?
These three REITs are unlikely to appeal to investors with a value inclination. When things are uncertain, though, it is generally wise to stick with the biggest and most powerful names. Within the REIT industry, Realty Income, AvalonBay, and Prologis all fall more generally into that category, as well as within their specific property specialties.
These REITs are likely to have the capital access they need to outperform at the company level in both good and bad times. This capacity should help them expand their leadership positions and back consistent profits over time. That’s the kind of investment that will allow you to sleep comfortably at night, which is probably a cost worth paying for conservative sorts.
In 2022, are REITs a viable investment?
To summarize, we believe that REITs provide some of the strongest risk-to-reward opportunities in today’s market because:
We’re in a period of rising inflation and ultra-low interest rates, which is great for landlords and borrowers.
REIT valuations have just recently recovered to pre-COVID levels, which were also historically low.
REITs have consistently outperformed during rising interest rate cycles, and they are particularly well-positioned to tackle another one today.
After years of undersupply, several property industries now have above-average growth potential, both internal and external.
Some REIT property sectors are currently mispriced, presenting chances for diligent investors to earn alpha-rich returns.
You may put your money into a REIT ETF (VNQ) and expect good returns in the next years. Those who can spot the biggest mispricings, on the other hand, are likely to make the most money. That’s what we’re aiming towards.
In 2021, how will REITs fare?
Real estate investment trusts will be one of the sectors that investors will remember in 2021. (REITs). REITs increased 40 percent as a group, compared to a 27 percent rise for the Standard & Poor’s 500 Index. That’s a remarkable outperformance for a market segment that is supposed to pay dividends rather than develop at a breakneck speed.
But there are a few points to keep in mind here that will help explain the massive profits and why investors shouldn’t expect a repeat performance in 2022.