Do REITs do well in high inflation?
Historically, REITs are one of the better-performing sectors during inflationary periods. We can see this in the following image. You'll notice REITs are in the upper right area, showing they are outperformers during periods of high inflation.
Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns.
REITs historically perform well during and after recessions | Pensions & Investments.
REITs, landlord companies that own and lease out various types of property, started 2023 strong but were soon pummeled by a one-two punch. First, rising interest rates pushed up the costs of financing property purchases.
With rate cuts on the line in the coming year, dividend yields for REITs are likely to be on the attractive side compared with the yields on fixed-income and money-market accounts. This will make REITs desirable to investors.
Rising interest rates raised borrowing costs and hammered property valuations. Attractive yields on bonds offered stiff competition to the distributions from REITs.
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.
Does Warren Buffett invest in REITs? The short answer is yes. Berkshire Hathaway does allocate capital real estate ownership throughout REITs. Learn Warren Buffett REIT investments below.
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.
Real estate can protect against inflation because rental or lease payments can increase annually to reflect price increases and land and building values can rise alongside inflation. Past research on listed real estate as an inflation hedge has used mean variance as a metric for measuring risk.
Can REITs go to zero?
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
Interest Rate Risk
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.
![Do REITs do well in high inflation? (2024)](https://i.ytimg.com/vi/JmzJ3pH0QNU/hq720.jpg?sqp=-oaymwEcCNAFEJQDSFXyq4qpAw4IARUAAIhCGAFwAcABBg==&rs=AOn4CLDAzBxADTekKNxInr-afkOMl7C1OA)
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.
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.
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.
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% |
Publicly traded REITs offer investors a way to add real estate to an investment portfolio or retirement account and earn an attractive dividend. Publicly traded REITs are a safer play than their non-exchange counterparts, but there are still risks.
However, there's no doubt whatsoever that Apple ranks as Buffett's biggest moneymaker in 2023. Nearly half of Berkshire's equity investments are in Apple stock (48.5%, to be precise). Shares of the tech giant have skyrocketed more than 50% this year.
As of Dec. 12, 2023 publicly traded U.S. equity REITs posted a one-year average dividend yield of 4.09 percent.
REIT Market Outlook and Forecast
The REIT market is projected to see 2.6% year-over-year growth in 2023. The REIT market is forecast to grow at a CAGR of 2.8% from 2022 to 2027. The market size is estimated to increase by $333.01 billion from 2022 to 2027.
Why doesn t Warren Buffett buy REITs?
Poor Rates Of Compounding: Another big reason why REITs generally have low appeal to Buffett and Munger is because real estate generates poor returns on invested capital.
REITs have been wealth-creating machines over the years. Realty Income, Equity Lifestyle, and Prologis have all outperformed the S&P 500 over the long term. These well-built REITs should continue enriching their investors in the future. They have the potential to turn long-term, consistent investors into millionaires.
REIT | Forward dividend yield |
---|---|
Blackstone Mortgage Trust Inc. (BXMT) | 12.1% |
KKR Real Estate Finance Trust Inc. (KREF) | 13.5% |
Easterly Government Properties Inc. (DEA) | 8.3% |
Realty Income Corp. (O) | 5.5% |
REIT investors have an expectation that a REIT's dividends will keep up with inflation. Historically, this has worked well. However, we can't forget, at least for publicly-traded REITs, that they are still traded like stocks. As interest rates rise, they can depress the price of these REITs.
Advantages of REITs
Investors who park their funds in a REIT can benefit in these following ways. Steady dividend income and capital appreciation: Investing in REITs is said to provide substantial dividend income and also allows steady capital appreciation over the long term.
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