How will REITs do in a recession?
When rates rise, REITs fall. At least that's the conventional wisdom. In recessions, interest rates fall. Normally bullish for REITs—consider them a “second-level” bet on a bond bounce.
With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year. Ultimately, the decision on whether or not to buy REITs will depend on the specific circ*mstances and risk tolerance of each investor.
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
Still, in a general sense, they are income securities and do trade like income securities. You can usually count on high-yielding REITs moving up when rates are moving down.
According to consensus forecasts from FactSet, the number will dip in 2023, drop further in 2024 and return to growth in 2025 and beyond before hitting $633mn for the 2027 calendar year.
Nine Reasons Not to Invest in REITs
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
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.
A continued improvement in interest rate sentiment, coupled with low valuations in the sector, could make 2024 a much better year for Reit investors than the last two years...
As we dive into 2024, the Fed's accommodative approach to tackling inflation is likely to provide an impetus to the REIT sector, which depends highly on the debt market to carry out business activities. These companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations.
- With the Federal Reserve at, or near, the end of its tightening cycle, REITs are well-situated for outsized performance in 2024. - The gap between REIT implied and private appraisal-based cap rates will likely close or converge in 2024.
Can you lose money investing in REITs?
Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
However, increases in interest rates often are driven by economic growth that may support the growth of REIT earnings and dividends in the future. Research shows that REITs returns have generally been positive and have often outperformed the S&P 500 in periods of rising interest rates.
Therefore, if rates begin to rise then REIT cash flows will decline at a time when discount rates are rising. They fear the end result will be capital losses that offset the higher distribution yield and result in negative total returns.
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.
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.
Fitch Ratings' sector outlook for 2024 for U.S. Equity REITs is deteriorating. Fitch does not anticipate a recession in 2024, still weaker conditions are likely.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
First, rising interest rates pushed up the costs of financing property purchases. Then, in March, some regional bank failures and false assumptions of an ensuing nationwide banking “crisis” triggered questions about the financial wherewithal of REIT tenants and possible follow-on effects on REITs themselves.
REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
It depends on many factors, including the investor's individual preferences, risk tolerance, and timeline. If you're looking for something steady that requires little to no work on your end, REITs are a good option. But if you like more control and freedom, a direct investment may be a better option.
How many REITs should I own?
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.
Over a 15-year period, according to Cohen & Steers, actively managed REIT investors realized an annualized 10.6% return. Of the other active strategies, opportunistic real estate funds placed second, at 9.8%. Core and value-added funds had average annualized returns of 6.5% and 5.6%, respectively, over 15 years.
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
Non-traded REIT shares are available only to investors who meet suitability standards established by the state where they live. A non-traded REIT has a limited lifespan, often seven to ten years, before ending in a liquidity event. principal as a result of the liquidity event.
