Are REITs a good investment right now?
REITs, which are required to pay out at least 90% of their taxable income to shareholders, are popular among income investors. The outperformance of REITs “is not surprising to us,” says Michael Knott, head of U.S. REIT research at Green Street, a research firm that specializes in real estate.
Attractive income
One reason REITs have generated solid total returns over the long term is that most pay attractive dividends. For example, as of mid-2021, the average REIT yielded over 3%, more than double the dividend yield of stocks in the S&P 500.
The S&P 500 was up 27%, with REITs as one of its top-performing sectors (+46.2%). In 2022, real estate stocks are a top choice amid heightened market uncertainty. They tend to provide higher yields, better values, strong growth rates, and solid profitability. REITs can also serve as an inflation hedge.
Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
Bankruptcies are extremely rare in the REIT sector. After all, REITs are required to keep the bulk of their assets in physical properties, or debt backed by real estate. Most real estate tends to appreciate over time, and as long as it holds its value, a REIT can sell properties to pay down debt in a pinch.
REITs are dropping due to fears of rising interest rates. As a result, we're now accumulating more shares at now even greater discounts.
Driven by a total return of 43 percent for the year, and outpacing the S&P by 14 percent, REITs across most major subsectors exhibited renewed optimism entering 2022. All REIT sectors posted positive returns last year, led by retail, self-storage, industrial, and multifamily.
When investors look back on 2021, one sector that will stand out is real estate investment trusts (REITs). As a group, REITs rose an impressive 40%, compared with a roughly 27% gain for the Standard & Poor's 500 Index.
The REIT sector as a whole saw the average P/FFO (2022) decline 0.3 turns in February (from 17.5x down to 17.2x). The average FFO multiples rose for 22.2% and declined for 77.78% of property types in February. There are no recent 2022 FFO/share estimates for either of the Advertising REITs.
REIT stock market performance has recovered partially from the initial downturn when the pandemic hit, when as of March 23, 2020, the FTSE Nareit All Equity REITs index had a -37.6% return year-to-date. REITs have delivered a 50% total return from the trough (as of Nov.
How much should you invest in REITs?
Private REITs
Private REITs may have an investment minimum, and that typically runs from $1,000 to $25,000, according to NAREIT, the National Association of Real Estate Investment Trusts.
REIT Pros. 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.
- Weak Growth. Publicly traded REITs must pay out 90% of their profits immediately to investors in the form of dividends. ...
- No Control Over Returns or Performance. Direct real estate investors have a great deal of control over their returns. ...
- Yield Taxed as Regular Income. ...
- Potential for High Risk and Fees.
Pros of REITs
They offer a low-cost way to invest in the real estate market. You can invest in a fund with as little as $500—a much lower entry point than direct real estate investing. Another benefit is that REITs offer enticing total return potential.
The data on REITs is clear
That has turned out to be a boon for the average investor because REITs have outperformed stocks over the long term, with many subsectors and specific REITs delivering superior returns. Because of that, investors should find a place for REITs in their portfolio.
"As commercial activity and day-to-day life normalize, demand for commercial and residential real estate space will continue to recover," says State Street Global Advisors. "Combined with higher rent inflation in 2022, this supports REIT dividend growth and potential valuation appreciation."
| Best Value REITs | ||
|---|---|---|
| Price ($) | Market Cap ($B) | |
| Annaly Capital Management Inc. (NLY) | 6.55 | 9.6 |
| New Residential Investment Corp. (NRZ) | 10.49 | 4.9 |
| AGNC Investment Corp. (AGNC) | 11.86 | 6.2 |
- High-Yield REIT No. ...
- High-Yield REIT No. ...
- High-Yield REIT No. ...
- High-Yield REIT No. ...
- High-Yield REIT No. 4: Annaly Capital Management (NLY)
- High-Yield REIT No. 3: Two Harbors Investment Corp. ...
- High-Yield REIT No. 2: ARMOUR Residential REIT (ARR)
- High-Yield REIT No. 1: Orchid Island Capital (ORC)
Since the start of the modern REIT era in 1991, U.S. REITs have outperformed the S&P 500 by more than 7% on average in late-cycle periods, and by even wider margins in recessions and early recoveries (cover exhibit).
Buying REITs after a crash historically has always been a good idea, and we have little doubt this time will be any different. But REITs aren't “perfect investments” either. In fact, there are many ways you can fail as a REIT investor. According to NAREIT, REITs have returned 15% per year over the past 20 years.
What type of REIT is the safest?
Most REITs pay above-average dividends backed by steady rental income. However, some REIT dividends are safer than others. Three of the safest in the sector are those paid by Prologis (PLD 0.00%), Camden Properties Trust (CPT -0.12%), and Realty Income (O -0.78%).
Despite a few jitters in late 2021 with the emergence of the Omicron variant of COVID-19, U.S. REITs performed very well in the past year, with a total return of 43 percent in 2021, according to the Nareit Equity REITs Index.
How They Earn. The REIT business model involves buying real estate, leasing space in those assets, and collecting rents from tenants. These rents generate income which is paid out to shareholders through dividends. This is the case for REITs that manage real estate assets.
REITs offer investors the benefits of real estate investment along with the ease and advantages of investing in publicly traded stock. REITs have historically provided investors dividend-based income, competitive market performance, transparency, liquidity, inflation protection and portfolio diversification.
Land (-12.25%) and Manufactured Housing (-11.45%) REITs suffered the steepest declines. The average REIT NAV premium of +0.04% at the end of 2021 dropped to a -7.27% discount during January. The median NAV premium of +2.29% at the end of December flipped to a discount of -5.7% by the close of January.
First NYSE REIT. June 1965 Continental Mortgage Investors becomes the first REIT to be listed on the New York Stock Exchange. View a list of REITs listed on the NYSE.
The MSCI US REIT Index is a free float-adjusted market capitalization weighted index that is comprised of equity Real Estate Investment Trusts (REITs). The index is based on the MSCI USA Investable Market Index (IMI), its parent index, which captures the large, mid and small cap segments of the USA market.
The Vanguard REIT Index Fund follows the MSCI US REIT Index, an index that tracks domestic equity real estate investment trusts (REITs and firms that manage properties and collect rent). The fund invests in REITs that purchase office buildings, hotels and other properties.
As of Dec. 1, 2021, REITs are up nearly 29% for the year with strong performance across sectors. REIT stock total returns since the onset of the pandemic are now in excess of 20%. The robust recovery speaks both to the unique nature of the COVID-19 crisis for real estate and to the resilience of REITs.
Historically, REITs have performed well during periods of rising long-term interest rates with average four-quarter return in periods with rising rates of 16.55% compared to 10.68% in non-rising rate periods from the first quarter of 1992 to the fourth quarter of 2021.
What is the average rate of return on REITs?
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.
In general, a good rule of thumb is that REITs should not make up more than 25% of a well-diversified dividend stock portfolio, depending on your individual goals (such as what portfolio yield and long-term dividend growth rate you're targeting, and how much volatility you can stomach).
Key Points. Inflation is higher than it has been in 30 years and will chip away at investor returns. REITs that specialize in industries that do well when prices rise -- or aren't hobbled by rising prices -- can help shield investors from inflation.
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
We believe that REITs are today a lot safer than regular stocks because: Their valuations are more reasonable. They provide better inflation protection. They generally outperform during times of rising rates.
Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.
In this article, we discuss 10 REIT stocks that pay monthly dividends. If you want to see some more REITs that generate monthly income, click 5 REIT Stocks that Pay Monthly Dividends. For exposure to the real estate sector, the next best opportunity is to explore real estate investment trusts.
However, a big difference is that REIT investors aren't signing on any of the loans and therefore, their liability risk is limited. They are not putting their personal credit on the line, which is a huge risk mitigation that most rental investors don't appear to comprehend.
Summary. REITs are selling off due to fears of rising interest rates. We are buying the dips because the positive impact of inflation is far superior to the negative impact of rising rates.
