“How did REITs do during the last time of rising interest rates?” asks Matt Frankel. When all else is equal, REITs are extremely sensitive to interest rates. The majority of dividend stocks are. When I say interest rates, I’m usually talking to treasury rates, such as the 10-year Treasury yield, which is an excellent benchmark to know.
In general, as that rate rises, REITs fall in value. The reason for this is that income investors expect a risk premium over what they can get from a risk-free investment like a treasury bond. For example, if a 10-year Treasury yields 2%, a REIT might yield 5%. If the 10-year Treasury yield jumps a percentage to 3%, investors will expect a similar percentage jump in their REIT dividend yield. Because the relationship between dividend yield and stock price is inverse, rising rates lead to higher dividend yields, which in turn leads to lower stock prices. That is, assuming everything else is equal. Everything isn’t always equal. Interest rates fell during the COVID epidemic, which would have been beneficial to REITs in a normal environment, but real estate was one of the hardest-hit sectors when the pandemic began. There are many other forces at work, and they aren’t all related to interest rates. Interest rates rising are negative for REITs in a regular, boring stock market, whereas interest rates falling are favorable for REITs.
To respond to Ryan’s question more directly, during the most recent period of rising interest rates, which was roughly from 2018 to 2019, REITs underperformed severely, and real estate was one of the worst-performing sectors in the market at that time. It still rose, but tech companies outperformed it, and it underperformed the S&P 500 by a small margin.
If you’re a REIT investor, keep in mind that it tends to even out over time. They do worse when rates rise and better when rates decrease, and because these are long-term investments, it tends to even out over time.
Is 2021 a good time to buy REITs?
So far in 2021, real estate investment trusts (REITs) have performed admirably. The real estate sector’s almost 30% total return (price plus dividends) until the end of August handily outperformed the S&P 500 Index’s 21%+ return.
Even better, several variables indicate that REITs will continue to outperform other assets in the remaining months of 2021.
The first is a lack of high-yielding crops. Both the 10-year Treasury note and the S&P 500 are currently yielding a pitiful 1.3 percent. REITs, on the other hand, pay out more than double that, with an average yield of 2.7 percent, making real estate equities one of the best-paying sectors in the market.
Why Singapore REITs are down?
The rental revenue of REITs will almost probably fall in the current situation caused by Covid-19. The hospitality trusts are the most vulnerable because to a dramatic drop in tourist numbers worldwide as practically every country is on lockdown. They will feel the pain right away.
Mall REITs with turnover rent agreements will be impacted as well, since their tenants’ revenue will drop dramatically, forcing them to provide rent subsidies. In the short term, office and industrial REITs with lengthier lease lock-ins (or WALEs) will do better, but as the economy declines, corporations will reduce their leasing demands, and rental rates will fall as well.
When earnings drop, so do asset values. When appraisers look at a property with a lower earning capacity, they will lower the price. This could force the REIT to sell assets or execute a rights issue in order to meet its gearing covenant or the MAS’ leverage ceiling (currently set at 45 percent debt-to-asset ratio).
Prices are pushed even lower in a dismal economic situation with low market sentiment, as many asset owners want to sell. In order to determine asset prices, valuers must compare similar transactions and reduce their valuations in lockstep.
All of this creates a vicious cycle that usually ends with a very dilutive rights offering at a cheap price to “save” the REIT.
As an investor, just when you think things couldn’t get much worse because you’re already losing money on the REIT’s stock, you get a capital call that demands you to pay additional money or risk being substantially diluted.
Are REITs a good buy now?
- No corporation tax: A company must meet certain criteria in order to be classed as a REIT. It must, for example, invest at least three-quarters of its assets in real estate and pay shareholders at least 90% of its taxable income. If a REIT fits these criteria, it receives a significant tax benefit because it pays no corporate tax, regardless of how profitable it is. Profits from most dividend stocks are effectively taxed twice: once at the corporate level and then again at the individual level when dividends are paid.
- High dividend yields: REITs offer above-average dividend yields because they must pay at least 90% of taxable revenue to shareholders. It could, for example, offer a secure dividend yield of 5% or more, but the typical S&P 500 company yields less than 2%. If you need income or wish to reinvest your dividends and compound your gains over time, a REIT can be a good solution.
- Total return potential: As the value of its underlying assets rises, a REIT’s total return potential rises as well. Real estate values rise over time, and a REIT can grow its worth by employing a variety of tactics. It might either build properties from the ground up or sell valued assets and reinvest the proceeds. A REIT can be a good total return investment when this is combined with substantial dividends.
- REITs were designed to provide average investors with access to commercial real estate assets that would otherwise be out of reach. Most people can’t afford to buy an office tower outright, but there are REITs that can.
- Diversification of your financial portfolio: Most experts think that diversifying your investment portfolio is a smart idea. Despite the fact that REITs are technically stocks, real estate is a distinct asset class from stocks. During difficult economic times, REITs tend to keep their value better than equities, and they’re a terrific way to add stable, predictable income. These are only two examples of how an all-stock portfolio’s inherent risk can be mitigated.
- Real estate transactions might take a long time to buy and sell, but REITs are a very liquid investment. A REIT can be bought or sold at any time. Because traded REITs can be purchased and sold like stocks, it’s simple to receive money when you need it.
- Direct ownership and management of a property is a business that demands time and effort. REIT shareholders do not own the properties or mortgages in its portfolio, thus they do not have to deal with property maintenance or development, landlord services, or rent collection as a property owner or management would.
How are REITs doing in 2021?
So far in 2021, the REIT sector has posted increases in every month, including a +1.77 percent average total return in May. In May, 58.24% of REIT securities had a positive total return. In May, hotels and student housing REITs outperformed all other property types, while corrections and health care REITs saw the biggest drops.
Is it a good time to buy REITs Singapore?
With COVID-19 in place and REIT prices in most sectors declining, this appears to be a good moment to invest in REITs. Singapore REITs actually plunged 70.56 percent during the global financial crisis of 2008. So, if you’re eager to go into REITs today and watch your portfolio grow, you must also be willing to watch it shrink.
Time in the market, as with any investment, is preferable than timing the market. As a result, always prepare ahead and assure your ability to hold.
If you’re unfamiliar with REITs, REIT stands for Real Estate Investment Trust, and S-REIT stands for Singapore REITs.
A REIT is a type of real estate investment trust that pools money from investors to invest in a portfolio of income-producing real estate properties.
REITs vary from regular equities in Singapore since they have a special tax transparency treatment. To be eligible, Singapore REITs must pay out at least 90% of their taxable revenue to unitholders in the same year that the income is received.
Disclaimer: This list is by no means complete, and anyone considering investing should conduct their own research. Information is current as of September 9, 2020.
Which REIT is the best in Singapore?
It turns out that the best performers are the typical suspects. With an average annualised return of 16.7%, Mapletree Industrial Trust (SGX: ME8U) is at the top of the list.
The REIT was listed on the stock exchange in October 2010, with a real estate portfolio of 70 properties valued at S$2.1 billion.
Fast forward to present, and Mapletree Industrial has grown to 114 properties valued S$6.7 billion, with Mapletree Industrial also entering the fast-growing data centre industry in 2017.
Meanwhile, REITs such as Mapletree Logistics Trust (SGX: M44U), Parkway Life REIT (SGX: C2PU), and Ascendas India Trust (SGX: CY6U) have benefited from holding high-quality assets and operating in markets with strong demand tailwinds.
Are Singapore REITs safe?
Due to the form of leasing agreements, the cash flow is stable and consistent, similar to that of a bond. In today’s low-interest-rate environment, it’s a more appealing option to bonds. REITs have historically provided a stable and rising source of income while also generating strong overall returns.
Do REITs do well in a recession?
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.
What is the 2% rule in real estate?
Purchasing a property and renting it out can help you pay off your mortgage while also potentially generating additional cash. Renting out your property can also provide you with passive income, allowing you to focus on other things while still earning money. Buying and renting properties is a simple method to begin investing in real estate. What do you need to know?
In real estate, the two percent rule relates to what percentage of the total cost of your residence you should ask for in rent. To put it another way, for a $300,000 property, you should be asking for at least $6,000 a month to make it worthwhile.
However, in metro real estate markets, the 2 percent guideline is frequently impossible to achieve. However, the average rental cost in a place like Philadelphia is $1,660, while the average home is $203,000. This can be a decent rule of thumb for determining what you would need to charge in order to be cash-flow positive relatively soon. In other words, charging $4,000 for an average home rental will be out of line with the local rental market.
Capital gains tax on real estate investment property will apply if you are not intending to live in your investment property (If you live there for at least 2 years, you can minimize – or even eliminate – your capital gains tax responsibility).
If you own property for less than a year, you’ll pay the same amount in taxes as if you were earning regular income. It’s considered a long-term capital gain if you’ve owned the property for at least a year. These profits are taxed at a reduced rate of 0%, 15%, or 20%, depending on your income and filing status.
What are the safest REITs?
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.
