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).
Are REITs a decent investment during a downturn?
In the event of a recession, how safe are REITs? Real estate investment trusts (REITs) are well-known for providing income to their shareholders.
A REIT is a company that owns and manages real estate holdings and distributes roughly 90% of its profits to shareholders in the form of dividends. As a result, investors can expect a consistent income stream, which is appealing due to the low-interest rate conditions.
Do you wish to invest in real estate investment trusts (REITs)? Bugis Credit can provide you with more information. While REITs have risks that you should consider before investing in them, they are safer than equities in a downturn. Let’s have a look at how we can do it.
How are REITs safer than stocks?
Investing in REITs is a terrific strategy for investors to preserve money while hedging against market volatility. Returns can be accessed without having to deal with direct ownership issues. Is it, however, a secure investment option during a downturn?
The answer is a resounding yes. Unlike possessing one commercial asset that might readily topple during an economic disaster, the investment involves large-scale real estate, including hotels, resorts, mortgages, warehouses, and office buildings.
To be safe in the face of oncoming economic uncertainty, it’s wise to diversify your holdings. The following discussion explains why:
An economic shock will have a significant impact on regular businesses long before it affects the ordinary REIT. A textile sector, for example, might be able to reduce service by halving its order book from one to the next.
It is, on the other hand, commonly referred to as a conservative property. It’s just a combination of some area on the globe plus structures built and developed by humans.
As a result, it’s a tangibly valuable asset to its occupants. Its value is consistent and long-lasting since it is relevant, flexible, and limited.
Real estate is important because shelter is a basic requirement, and everyone requires a place to live. People also require land to cultivate food, factories to produce things, and warehouses to store goods for sale or consumption and use. To put it another way, real estate is more crucial for human existence and wealth, and it is difficult to replace it.
Flexibility is seen through how one building can serve various functions even without making changes to it.
Small alterations or improvements may be necessary at times, but you can be sure that they will pay off in the long run. It is for this reason that a building with an unproductive business is not a waste because of its flexibility.
When we say that real estate is restricted, we’re just implying that the area of the earth’s land isn’t endless. It only has a few zones that are appropriate for human settlement and agriculture, for example. The Sahara desert is unsuitable for cultivation.
The three characteristics are the primary reasons why real estate cannot be considered worthless. Mismanagement and overleveraging are the only things that can go wrong.
Because many portfolios with dozens or hundreds of professionally managed investments have little leverage, REITs are particularly affected. This makes it easier to weather a downturn. Stocks, on the other hand, come and go, as Amazon replaced Sears, Nokia replaced Apple, and so on.
The best REITs for a recession
Data centers are one of the real estate sectors that has escaped the effects of the recession. Regardless of the company’s financial situation, all data must be maintained properly and securely, and QTS plays a critical part in this.
In 2019, the price of QTS shares increased by 85 percent. Despite the recession, the company’s shares hit a fresh 52-week high in April. QTS has also benefited from most Americans’ present employment condition. Many data centers are operational, and QTS saw a 30 percent increase in clients as a result of the work-from-home policy.
Working remotely is difficult for a number of Americans. For QTS, this means that their primary goal should be the internet and the online workplace. That is to say, regardless of the state of the economy, data centers are still necessary. As a result, investing in it is a good move.
Apart from data centers, communication sites are another type of real estate that can withstand a downturn. The American Tower rents space on telephone towers to major firms for the installation of communication equipment.
The corporation owns a number of towers from which your phone receives service. It also saw a significant growth in income in 2019–for example, between December 2018 and April 2020, it increased by more than 70%.
Equinix is a data center in the real estate market, similar to QTS, but significantly more powerful. It is the world’s largest data center, with 205 locations in 25 countries across five continents.
It increased by almost 97 percent in 2019 compared to QTS. The company is well-known for its data storage partnerships with large corporations and third-party providers such as Amazon, Microsoft Azure, and Google Cloud. It pays out enormous dividends, 1.56 percent annually, and it recently staggered $2.66 per share in February 2020.
Being a global leader in data centers, not to mention the substantial dividends paid, makes this one of the greatest REITs to invest in.
Apartment construction and multifamily housing For one thing, REITs can weather a downturn because housing is a basic human need. Multifamily residences, on the whole, experience small rent losses and are likely to rebound soon.
Residential apartments are among the most in-demand real estate units in the United States. While the stock market has been volatile recently, the share price has remained stable since August. Investors received a dividend yield of 2.6 percent.
The bottom line
REITs are safer to invest in during a downturn than stocks. It’s because REITs have historically performed well during downturns.
They are also more sturdy and solid than other companies. Furthermore, the majority of properties generate cash flows that are highly resilient to recessions. Equinix, American Tower, and QTS Realty Inc. are among the greatest assets for surviving a recession. They’re lot more powerful, and they’re not likely to face the same difficulties as other industries.
Their returns are likewise consistent, owing to the lease payments rather than market swings. For these reasons, you should include them in your REIT selection process.
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 generated solid 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 increasing 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 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.
Are REITs currently a smart investment?
REITs have long been viewed as low-risk investments with the potential for capital growth and consistent income, making them suitable complements or alternatives to bonds and cash in a portfolio.
That steadiness may appear even more appealing than ever in today’s battered market. The share price may decline, as it has recently, but the income helps to soothe the pain of your portfolio as you wait for the market to recover, as it always does. In that sense, REITs might be a great method to plan ahead for passive income.
In 2022, are REITs a viable investment?
In January, REITs with a micro cap (-1.65%) and a small cap (-5.47%) outperformed their larger peers. Mid caps (-5.77%) and large caps (-7.20%) underperformed due to significant losses at the start of the year. In January 2021, after a year in which large caps dominated and micro caps trailed far behind, a significant turnaround occurred, with a substantial negative correlation between total return and market cap. On a YTD 2022 total return basis, small cap REITs outperform large caps by 173 basis points.
Is Warren Buffett a REIT Owner?
STORE Capital (STOR 1.16 percent ) is not just a stock in Berkshire Hathaway’s (BRK. A -0.22 percent )(BRK. B -0.29 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 will weather the storm?
Parts of the real estate industry may provide some protection 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 data center REIT with a strong rate of expansion. 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. With a presence in most major U.S. cities, the firm manages and leases more than 40,000 cell towers. 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. In addition, Amazon is one of DRE’s largest tenants. 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.
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.
How will REITs be managed in 2021?
It’s a fact: According to Nareit’s Q4 REIT Performance Report, 2021 was the REIT industry’s best year since 1976.
REITs outperformed the stock market in terms of investment returns. In 2021, the FTSE Nareit All Equity REIT Index returned 41.3 percent, while the FTSE Nareit Equity REITs index returned 43.2 percent. The S&P 500, on the other hand, returned 28.7% in 2021.
What is the typical REIT return?
According to Cohen & Steers, active managed REIT investors earned an annualized 10.6 percent return over a 15-year period. Opportunistic real estate funds came in second among the active strategies, with 9.8%. Over a 15-year period, core and value-added funds produced average annualized returns of 6.5 percent and 5.6 percent, respectively.
Is it true that REITs are riskier than stocks?
REITs aren’t thought to be particularly dangerous in general, especially when they have diversified holdings and are part of a diversified portfolio. REITs, on the other hand, are subject to interest rate fluctuations and may not be as tax-efficient as other investments. If a REIT is concentrated in a single industry (for example, hotels), and that industry is badly impacted (for example, by a pandemic), losses can be exacerbated.