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 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 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 a decent investment at the moment?
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.
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 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 will weather the storm?
It’s crucial to remember that nothing can fully protect you against a recession. Any venture has weaknesses and hazards, and each economic downturn presents new obstacles.
While no recession is the same as the last, there are some real estate sectors that are more robust during a downturn. Real estate investments that meet people’s basic requirements, such as housing and agriculture, or that provide important services for economic activity, such as data processing, wireless communications, industrial processing and storage, or medical facilities, are more likely to weather the storm.
Investors can own and manage properties in any of the asset classes, but many prefer to invest in real estate investment trusts (REITs) (REIT). REITs can be a more affordable and accessible method for investors to enter into real estate while also obtaining access to institutional-quality investments in a diversified portfolio.
Data centers
We live in a data-driven technology era. Almost everything we do now requires data storage or processing, and the demand for data centers will only grow in the next decades as more technological or data-driven gadgets are released. During recessions, more people stay at home to watch TV, use their computers or smartphones, or, in the case of the recent coronavirus outbreak, work from home, increasing the need on data centers. According to the National Association of Real Estate Investment Trusts, there are currently five data center REITs to select from, with all five up 33.73 percent year to date (NAREIT).
Self-storage
Self-storage is widely regarded as a recession-proof asset type. As budgets tighten, some families downsize, relocating to other places to better their quality of life or pursue a new work opportunity, or downsizing by moving in with each other to save money. This indicates that there is a higher need for storage.
The COVID-19 pandemic, on the other hand, has had an unforeseen influence on the storage industry. While occupancy has remained high, eviction moratoriums and increasing cleaning and safety costs have resulted in lower revenues. According to NAREIT, self-storage REITs are down 3.51 percent year to date. However, this industry is expected to recover swiftly, particularly for companies like Public Storage (NYSE: PSA), the largest publicly traded self-storage REIT, which has a strong credit rating and a diverse portfolio.
Warehouse and distribution
E-commerce has altered the way our economy works. Demand for quality warehousing and distribution centers has soared as more consumers purchase from home than ever before. Oversupply of industrial space, particularly warehouse and distribution space, is a risk, given that this sector has been steadily growing for the past decade; however, as a result of COVID-19, it has already proven to be the most resilient asset class of all commercial real estate, making it an excellent choice for a recession-resistant investment. Prologis (NYSE: PLD), one of the major warehousing and logistics REITS, and Americold Realty Trust (NYSE: COLD), a REIT that specializes in cold storage facilities, have both proven to be quite durable in the present economic situation, with plenty of space for expansion.
Residential housing
People will always require housing. Residential housing, which can range from single-family homes to high-rise flats or retirement communities, fulfills a basic need that is necessary even in difficult economic times. During economic downturns, rents may stagnate and evictions or foreclosures may increase, but residential rentals are a relatively reliable and constant source of income. Despite the COVID-19 challenges, American Homes 4 Rent (NYSE: AMH), which specializes in single-family rental housing, and Equity Residential (NYSE: EQR), which specializes in urban high-rises in high-density areas, are two of the largest players in residential housing, both of which have maintained high occupancy and collection rates.
Agriculture
Aside from housing, agriculture and food production are two additional critical services on which our country and the rest of the world rely. Our existing food system is primarily reliant on industrial agriculture, but more and more autonomous and regenerative agricultural projects are springing up, allowing for more crop diversification, increased productivity, and reduced economic and environmental risk.
Wireless communication
Wireless communication has grown into a giant sector, with American Tower (NYSE: AMT) and Crown Castle International (NYSE: CCI) being two of the world’s largest REITs. Cell tower REITs that provide telecommunication services are an important part of our world today, and while growth prospects can be difficult to come by, very good track records and rising demand make this a terrific real estate investment that will weather any economic downturn.
Medical facilities
Medical facilities, senior housing, hospitals, urgent care clinics, and surgery centers all provide a vital service that will always be in demand, even during economic downturns.
Retail centers
Before you abandon ship when you see this category, let me state unequivocally that retail is not dead, at least not in all forms. Grocery stores and other retail outlets that provide critical services and products will continue to be in demand, as they did during the last pandemic. The issue here is for retail REITs to invest in the vital service sector with such focus that other sectors such as tourism, restaurants, or general shopping and goods do not put the company or investment at risk.
Is 2022 a favourable year for real estate investment trusts?
This will be a period of economic expansion that will fuel recovery across a broad variety of real estate and REIT industries, assuming COVID-19 versions remain substantially in check. 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?
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.
Will REITs be successful in 2022?
The large cap REIT premium (compared to small cap REITs) reduced in the first month of 2022, but investors are still paying nearly 41% more for each dollar of 2022 FFO/share in large size REITs (22.7x/16.1x – 1 = 41.0 percent). There is now a substantial positive association between market cap and FFO multiple, as shown in the table below.
The average premium/discount of REITs in each market cap bucket is shown in the table below. The data demonstrates a substantial, positive association between market cap and Price/NAV, similar to the data for price/FFO. The average large cap REIT (+4.12%) trades at a single-digit premium to consensus NAV, while the average mid cap REIT (-7.04%) trades at a single-digit discount. Small cap REITs trade at a double-digit discount (-13.76 percent), while micro caps trade at less than 2/3 of their individual NAVs on average (-35.43 percent ).
Short interest in REITs grew at the start of the year, increasing 20 basis points in the first 14 days of the month. Despite a small decrease in short interest in mall REITs, malls remain the most actively shorted REIT property type. The average short interest rate for all US REITs increased from 3% to 3.2 percent, with Land and Advertising REITs having the lowest short interest rate at at 1.5 percent.
NETSTREIT (NTST) had a 21% increase in short interest in the first two weeks of the year, making it the second most heavily shorted REIT. Short interest fell the most in Retail Opportunity Investments Corp. (ROIC) and Ashford Hospitality Trust (AHT).
Given that investors short equities they have reason to believe will decrease significantly in price, high short interest might be a bad flag. Investors have been massively shorting individual REITs due to a variety of potential catalysts. For example, the danger of adverse government policies at both the federal and state levels, high debt, and limited access to financial markets are all catalysts for shorting GEO Group (GEO), which owns and runs private prisons. Potential continuing retail sector problems, as well as excessive debt that may be difficult to refinance at maturity, are triggers for Pennsylvania REIT (PEI), Seritage Growth Properties (SRG), Tanger Factory Outlet Centers (SKT), and Macerich (MAC). Shorts on SL Green Realty (SLG) and Vornado (VNO) are wagering that the New York office sector will not fully recover from the pandemic and government shutdowns.
Although high short interest is common, it does not always imply that a REIT is a bad or extremely hazardous investment. In other circumstances, excessive shorting may not be justified, and the bear thesis may fail to materialize, resulting in short investors closing out their positions by buying shares. While a short squeeze is rarely as large as what we saw with GameStop (GME) and AMC Entertainment Holdings (AMC) earlier this year, it can still be beneficial to long investors’ total return when both bullish and pessimistic investors buy shares of a stock at the same time. It’s worth noting, though, that if a REIT (or any other firm for that matter) is substantially shorted, it’s always a good idea to properly understand the bear case before taking a long (or short) position.
Those REITs that are increasing their payouts in 2022 are not among the most shorted REITs. In January, Gladstone Commercial (GOOD), Gladstone Land (LAND), and STAG Industrial (STAG) all increased their monthly dividends by a small amount. Life Storage (LSI) and UMH Properties (UMH) both increased their quarterly payouts by a large amount. Strong fundamentals and growing earnings have aided all of these dividend hikes. The list of REITs raising their dividends in 2022 is anticipated to become larger every month, thanks to solid REIT earnings.
Note from the editor: This article discusses one or more microcap stocks. Please be aware of the dangers that these stocks entail.
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.