REITS and Inflation Protection (2024)

FAQs

REITS and Inflation Protection? ›

REITs have been an attractive haven for investors seeking protection against inflation. During historical periods of medium-to-high inflation and rising interest rates, REITs have generated positive total returns and outperformed equities, as compared to the S&P 500 and the MSCI AC World Index.

As interest rates rise, they can depress the price of these REITs. So while dividends may climb with interest rates, the price of publicly-traded REITs may decline. Historically, REITs are one of the better-performing sectors during inflationary periods.

During inflationary periods, experts suggest making the most of your returns by investing in assets that have historically delivered returns that outpace the rate of inflation. Examples include diversified index funds, as well as carefully investing in things like gold, real estate, Series I savings bonds and TIPS.

REITs historically perform well during and after recessions | Pensions & Investments.

Interest Rates: A rise in interest rates may reduce demand for REITs, as investors choose other vehicles like U.S. Treasuries that are government-guaranteed, and pay a fixed interest rate.

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

Adding certain asset classes, such as commodities, to a well-diversified portfolio of stocks and bonds can help buffer against inflation. Be cautious about overallocating to cash, but make sure your emergency savings are keeping up with rising costs.

Invest in real estate

Buffett has previously said that real estate investments generally stand up well against inflation: “...you buy once, and then you don't have to keep making capital investments. So, you do not face the problem of continuous reinvestments involving greater and greater dollars because of inflation.”

Is cash king during inflation? ›

Having more cash allows you to take advantage of more investment opportunities in an inflationary environment. It can be quickly converted into other assets or used to make purchases when cash prices are favorable to loans.

Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS. Many people have looked to gold as an "alternative currency," particularly in countries where the native currency is losing value.

For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.

Though 2022 and 2023 were challenging years for REITs, the recovery is likely on the horizon. Edward F. Pierzak is senior vice president of research at Nareit where his primary responsibility is contributing to Nareit's commercial real estate and macroeconomic analysis.

In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023. Based on historical experience, the convergence of the wide valuation gap between public and private real estate will likely ensure continued REIT outperformance into 2024.

With rate cuts on the horizon, we believe investors have an opportunity to continue investing into S-Reits as the high estimated dividend yield of close to 7 per cent in 2024 will look increasingly attractive.

REITs Can Hedge Inflation — But Not During a Market Crisis.

Looking ahead, we believe REITs are well positioned to continue to grow externally and capture presence in the market. Despite challenging market conditions, 2022 and 2023 saw continued levels of REIT M&A activity, and we expect that activity to accelerate throughout 2024 and beyond.

Real Estate Income

This results in the landlord earning a higher rental income over time. This helps to keep pace with the rise in inflation. For this reason, real estate income is one of the best ways to hedge an investment portfolio against inflation.