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 charge, 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 decisions that aren’t always 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.
Which REITs will weather the storm?
Parts of the real estate sector can give insulation against economic downturns. Even though the economy is still growing, the recovery from the pandemic is slowing, with investors worried about inflation risks and the chronic delta version of the coronavirus eroding and possibly reversing that progress. If cautious investors take defensive positions before economic cycles alter, they can be ahead of the game. Income-generating real estate investment trusts, which buy property, collect rent, and distribute at least 90% of their taxable income to shareholders, can be a good defensive investment. REITs are an excellent gauge for how REITs are performing since they produce consistent income through dividend payouts, which boost investment returns. Because their prices are unlikely to see substantial variations during an economic crisis, it’s preferable to concentrate on REITs in solid areas like storage, distribution, and data centers, as well as health care facilities. During more difficult economic circumstances, these seven REITs have the potential to offer favorable results.
COLD is a publicly traded real estate investment trust that specializes on connecting food farmers with supermarkets, restaurants, and other food service providers. It’s also noted for being a market leader in temperature-controlled warehouse management, acquisition, and development. The business model of Americold is what sets it apart. The company provides supply chain solutions as well as digital solutions to provide inventory insight to food producers, retailers, and service providers throughout the world. COLD also provides transportation consolidation to ensure that inventory is delivered quickly. The REIT exhibited a strong recovery from the depths of pandemic shutdowns, with revenue up 33% year over year in the first half of 2021. COLD is also a REIT to consider during a downturn because it has the most experience in supply chain services in its industry.
CONE is a high-growth REIT specializing on data centers. Health care, technology, retail, energy, entertainment, and finance are among the industries in which it operates. CONE has a global footprint, with data centers throughout North and South America, as well as Europe. CONE announced expansions in Madrid and Frankfurt, Germany, two of Europe’s strongest data center markets, in its most recent earnings release. CONE’s financial performance in 2021 was impressive. The company saw a 21 percent growth in revenue year over year in the first quarter, followed by an 11 percent increase in the second quarter. With a gross asset value of more than $9 billion and long-term debt of $3.5 billion, the company has a healthy financial sheet. ESG, or environmental, social, and governance, themes such as energy efficiency and renewable alternatives are part of the company’s mission statement.
Life Storage has been in the self-storage market for a long time. Since its founding in 1985, LSI has grown to become one of the world’s largest storage companies. During the pandemic, the company experienced significant growth, which explains its geographically diverse portfolio and growth approach. Life Storage has over 1,000 facilities in 34 states and a diverse customer base that includes both residential and commercial clients. Asset recycling is used by LSI to assist generate new properties with stronger revenue growth. In addition, LSI just increased its dividend by 16 percent, which could appeal to income investors.
CCI is a leader in the business when it comes to expediting network connections, scaling networks, and constructing industrial networks. The corporation operates and leases more than 40,000 cell towers, having a presence in most major U.S. cities. This infrastructure connects communities and businesses across the country to wireless services. With the rise in smartphone data usage and the need for new 5G networks, the company’s industry expertise in accelerating network connections and enhancing technological infrastructure is helping to fuel this expansion. CCI has a higher forward dividend yield than the market median of 2.3 percent.
Construction, development, property management, and leasing are among DRE’s supply chain specialties. Duke Realty is an e-commerce favored developer that stands out as a distribution leader, which offers it an advantage because industrial warehouses that store merchandise from e-commerce transactions will continue to be in demand. Plus, one of DRE’s top tenants is Amazon. Duke will gain from the industry’s need for large-scale warehouses and distribution centers as e-commerce continues to grow. Duke Realty offers assets strategically positioned across the country that provide access to industrial development sites and mixed-use developments.
WELL is known for investing in properties that provide services including elder housing, outpatient medical facilities, and rehabilitation centers, all of which are aimed at keeping patients out of hospitals and lowering health-care expenses. Sunrise Senior Living, Cogir Real Estate, and Brandywine Living are just a few of Welltower’s key partners. WELL is well positioned to profit from the predicted spike in senior health-care costs. Indeed, the health-care industry is thought to be recession-proof since it is always a priority, regardless of economic conditions.
What investments perform well during a downturn?
During a recession, a solid investing approach is to look for companies that are retaining strong balance sheets or stable business models despite the economic downturn. Utilities, basic consumer products conglomerates, and defense stocks are examples of these types of businesses. Investors frequently increase exposure to these groups in their portfolios in anticipation of declining economic conditions.
Is 2022 a favourable year for real estate investment trusts?
Assuming COVID-19 versions hold mostly in check, this will be a period of economic expansion that will support recovery across a broad variety of real estate and REIT industries. As Calvin Schnure of Nareit summarizes, the coming year is likely to see a significant improvement in overall economic conditions, with higher GDP, job growth, and incomes, in a supportive financial market environment where inflation pressures gradually subside and long-term interest rates remain well below historical norms.
The Paul Simon lyric “nothing is different, yet everything’s changed” resonates as we hopefully transition out of this period of human loss and economic and social turmoil. Schnure’s perspective takes into account what we may deduce about which of the enormous changes in how we interact with real estate and the built environment are permanent and which are transient. Most importantly, he discusses how rising digitization of shopping will affect retail, as well as how the future of office use will alter as companies return to the office and experiment with hybrid and work-from-home arrangements.
In 2021, how will REITs fare?
When investors look back on 2021, one sector that will stand out is real estate investment trusts (REITs) (REITs). As a group, REITs soared an amazing 40 percent , compared with a roughly 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.
Is Warren Buffett a REIT Owner?
Not only is STORE Capital ( STOR -2.56 percent ) in Berkshire Hathaway’s ( BRK. A 0.83 percent )( BRK. B 0.70 percent ) stock portfolio, but it’s the only real estate investment trust (REIT) the Warren Buffett-led conglomerate has chosen to put its own capital into.
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.
Should I put money into REITs?
Why should I invest in real estate investment trusts (REITs)? REITs are investments that provide a total return. They usually provide significant dividends and have a moderate chance of long-term financial appreciation. REIT stocks have long-term total returns that are comparable to value equities and higher than lower-risk bonds.
In a downturn, how do you make money?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
What should I buy before the financial crisis?
Having a healthy supply of food storage is one of the best ways to protect your family from economic swings. In Venezuela, prices doubled every 19 days on average. It doesn’t take long for a loaf of bread to become unattainable at that pace of inflation. According to a BBC News report,
“Venezuelans are starving. Eight out of ten people polled in the country’s annual living conditions survey (Encovi 2017) stated they were eating less because they didn’t have enough food at home. Six out of ten people claimed they went to bed hungry because they couldn’t afford to eat.”
Shelf Stable Everyday Foods
When you are unable to purchase at the grocery store as you regularly do, having a supply of short-term shelf stable goods that you use every day will help reduce the impact. This is referred to as short-term food storage because, while these items are shelf-stable, they will not last as long as long-term staples. To successfully protect against hunger, you must have both.
Canned foods, boxed mixtures, prepared entrees, cold cereal, ketchup, and other similar things are suitable for short-term food preservation. Depending on the food, packaging, and storage circumstances, these foods will last anywhere from 1 to 7 years. Here’s where you can learn more about putting together a short-term supply of everyday meals.
Food takes up a lot of room, and finding a place to store it all while yet allowing for proper organization and rotation can be difficult. Check out some of our friends’ suggestions here.
Investing in food storage is a fantastic idea. Consider the case of hyperinflation in Venezuela, where goods prices have doubled every 19 days on average. That means that a case of six #10 cans of rolled oats purchased today for $24 would cost $12,582,912 in a year…amazing, huh? Above all, you’d have that case of rolled oats on hand to feed your family when food is scarce or costs are exorbitant.
Basic Non-Food Staples
Stock up on toilet paper, feminine hygiene products, shampoo, soaps, contact solution, and other items that you use on a daily basis. What kinds of non-food goods do you buy on a regular basis? This article on personal sanitation may provide you with some ideas for products to include on your shopping list.
Medication and First Aid Supplies
Do you have a chronic medical condition that requires you to take prescription medication? You might want to discuss your options with your doctor to see if you can come up with a plan to keep a little extra cash on hand. Most insurance policies will renew after 25 days. Use the 5-day buffer to your advantage and refill as soon as you’re eligible to build up a backup supply. Your doctor may also be ready to provide you with samples to aid in the development of your supply.
What over-the-counter drugs do you take on a regular basis? Make a back-up supply of over-the-counter pain pills, allergy drugs, cold and flu cures, or whatever other medications you think your family might need. It’s also a good idea to keep a supply of vitamin supplements on hand.
Prepare to treat minor injuries without the assistance of medical personnel. Maintain a well-stocked first-aid kit with all of the necessary equipment.
Make a point of prioritizing your health. Venezuelans are suffering significantly as a result of a lack of medical treatment. Exercise on a regular basis and eat a healthy diet. Get enough rest, fresh air, and sunlight. Keep up with your medical and dental appointments, as well as the other activities that promote health and resilience.