REIT prices tend to climb in tandem with interest rates during periods of economic expansion. The rationale behind this is that as the value of their underlying real estate assets rises, so does the value of REITs. As the economy grows, so does the demand for funding, resulting in higher interest rates. In a declining economy, as the Fed tightens monetary policy, the link becomes negative. This relationship may be observed in the graph below, which shows the relationship between REIT total returns and 10-year Treasury yields from 2000 to 2019.
REIT returns and interest rates have a favorable association for the most part, advancing in the same direction. This is most evident between 2001 and 2004, and 2008 and 2013. The periods of inverse correlation, immediately after 2004, 2013, and 2016, are all associated with Fed monetary tightening policies, which are aimed at undoing the effects of monetary stimulus policies implemented mostly in response to recessions. Interest rates soared in this area, while REIT values fell.
A study by S&P, which looked at six periods starting in the 1970s when the yield on the 10-year Treasury increased significantly, adds to this thesis. Increased interest rates were compared to REIT and stock performance throughout those times in the study. The following table summarizes the information.
REIT returns improved during four of the six times of interest rate hikes, outpacing the stock market in three of them.
However, depending on the interest rate environment, there are additional aspects and other comprehensive observations to examine, which may suggest good or negative returns for REIT investments.
The first important consideration is that not all REITs are made equal. First and foremost, REITs are involved in a wide range of sectors. Healthcare, hotel, residential, industrial, and a variety of other industries are among them. Each of these industries has its own set of variables that react to the economy in distinct ways. Another crucial indicator is a REIT’s debt profile, or how much money they borrow to expand their business. The debt profile defines a REIT’s ability to pay down debt and the timeframe in which it may do so, which is influenced by interest rate conditions.
The findings suggest that REITs may not be overly reliant on interest rate scenarios, and that there are other other elements at play when deciding how a REIT would perform at various interest rates. Interest rate fluctuations may have no effect on the returns from REIT investments. As with any investment, it’s critical to research the REIT in question, as well as its past performance, dividend distribution history, and debt levels.
Why did the REITs go up?
Real assets (including REITs) are currently undergoing a historic transformation as investors seek three things: current income, inflation protection, and predictable long-term total returns.
Are REITs worth it in 2021?
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 are REITs performing well?
Parts of the real estate industry may provide some protection against economic downturns. Even though the economy is still growing, the recovery from the pandemic is slowing, with investors worried about inflation risks and the chronic delta version of the coronavirus eroding and possibly reversing that progress. If cautious investors take defensive positions before economic cycles alter, they can be ahead of the game. Income-generating real estate investment trusts, which buy property, collect rent, and distribute at least 90% of their taxable income to shareholders, can be a good defensive investment. REITs are an excellent gauge for how REITs are performing since they produce consistent income through dividend payouts, which boost investment returns. Because their prices are unlikely to see substantial variations during an economic crisis, it’s preferable to concentrate on REITs in solid areas like storage, distribution, and data centers, as well as health care facilities. During more difficult economic circumstances, these seven REITs have the potential to offer favorable results.
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 done 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.
REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.
Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.
No Control Over Returns or Performance
Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.
Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.
Yield Taxed as Regular Income
Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.
And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.
Potential for High Risk and Fees
Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.
Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
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.
Which REITs pay the highest dividend?
For income investors, the beauty of REITs is that they are obligated to release 90% of their taxable income to shareholders in the form of dividends each year. REITs often do not pay corporate taxes in exchange.
As a result, several of the 171 dividend-paying REITs we follow have dividend yields of 5% or more.
Bonus: Watch the video below to hear our chat with Brad Thomas on The Sure Investing Podcast about sensible REIT investing.
However, not all high-yielding stocks are a sure bet. To ensure that the high yields are sustainable, investors should carefully examine the fundamentals. This post will go through ten of the highest-yielding REITs on the market with market capitalizations over $1 billion.
While the securities discussed in this article have exceptionally high yields, a high yield on its own does not guarantee a good investment. Dividend security, valuation, management, balance sheet health, and growth are all critical considerations.
We advise investors to take the research below as a guide, but to conduct extensive due diligence before investing in any security, particularly high-yield securities. Many (but not all) high yield securities are at risk of having their dividends cut and/or their business outcomes deteriorate.
High-Yield REIT No. 10: Omega Healthcare Investors (OHI)
Omega Healthcare Investors is one of the most well-known healthcare REITs that focuses on skilled nursing. Senior home complexes account for around 20% of the company’s annual income. The company’s financial, portfolio, and management strength are its three primary selling factors. Omega is the market leader in skilled nursing facilities.
High-Yield REIT No. 9: Apollo Commercial Real Estate Finance (ARI)
In 2009, Apollo Commercial Real Estate Finance, Inc. was established. It’s a debt-oriented real estate investment trust (REIT) that invests in senior mortgages, mezzanine loans, and other commercial real estate-related debt. The underlying real estate properties of Apollo’s investments in the United States and Europe serve as collateral.
Hotels, Office Properties, Urban Pre-development, Residential-for-sale inventory, and Residential-for-sale construction make up Apollo Commercial Real Estate Finance’s multibillion-dollar commercial real estate portfolio. Manhattan, New York, the United Kingdom, and the rest of the United States make up the company’s portfolio.
High-Yield REIT No. 8: PennyMac Mortgage Investment Trust (PMT)
PennyMac Mortgage Investment Trust is a real estate investment trust (REIT) that invests in residential mortgage loans and related assets. PMT
Can you get rich investing in REITs?
There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.
However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).
Is inflation bad for REITs?
In the 1970s, the same three acts were taken. Everyone understands that rising oil prices and the federal government’s reckless financial maneuvering were to blame.
Despite the government’s enhanced social programs, inflation stayed at only 1.1 percent in the early 1960s. However, in 1965, the Vietnam War broke out, and increased demand for industrial goods drove up prices.
Consumers had greater spending money in 1969, when consumer price inflation had risen to more than 5%.
The same can be said of government attitudes in the two periods. In fact, it’s possible that this is the most important comparison.
In her article, Kathy Jones expands on this “Is 1970s Style Inflation Making a Comeback?” from Charles Schwab:
Today, the Fed, like in the 1970s, is deciding whether or not to allow inflation to rise. After a thorough examination of its actions over the past few decades, it came to the conclusion that it had placed too much emphasis on inflation, which had stifled economic growth and kept down job growth and salaries for many workers. Before the Covid-19 crisis, it was the case. Faced with the pandemic’s deflationary effects, the Fed now believes it has room to err on the side of being too easy for too long.
However, we are not entirely reliving history at this time. As I’ll demonstrate further down, history never repeats itself word for word.
As Scott Horsley points out in his article, “Do You Think Inflation Is a Problem Right Now? NPR’s “Let’s Take a Step Back to the 1970s”:
Treasury Secretary Janet Yellen and others in the administration say that the present price increase is a one-time occurrence caused by supply shocks related to the pandemic and pent-up consumer demand.
The mentality of today’s America, though, is a significant and distinct difference. In the 1970s, the general population in the United States believed that inflation was unavoidable. However, not everyone is now so negative.
People will be more willing to accept lower salary increases if they feel prices will remain relatively stable. People who sell products will not demand large price rises. Once that psychology has taken hold, it has a tendency to repeat itself.
Alan Blinder, an economist who served as the Federal Reserve’s vice chairman in the 1990s, agrees with this assessment:
If you’re a business and expect inflation to be 5%, your prices will almost certainly go up 5% when it’s time to set them for the next year. On the other hand, if you believe inflation will be 1%, you’re more likely to increase by 1%.
Whether those predictions prove to be correct or entirely incorrect will be determined by the passage of time. For the time being, however, we do have options for dealing with the current and even future situations, whatever they may be.
Investors, understandably, hope that the current round of inflation isn’t a one-time occurrence. And it’s possible that it will be.
Regardless of whether we see a speedy rebound or continued inflation, REITs remain a strong investment option.
Regardless, “While “inflation” may appear to be a nasty term, a small amount of it can be beneficial to the economy. And a lot of money doesn’t always kill certain industries, particularly REITs.
After all, the value of real estate tends to rise in tandem with the value of consumer items. Cohen & Steers, a worldwide investment manager, explains this in their report “Three Inflation-Resilient Portfolio Building Strategies”:
1st “Higher prices for labor, land, and construction supplies might raise the economic threshold for new development, therefore property values tend to rise with the general pricing environment. As a result, new supply may be constrained, encouraging higher occupancies and allowing landlords more flexibility to raise rents.”
2. Inventive+ phrasing “Hotels, self-storage, apartments, senior housing, and billboards, among other property types with shorter lease terms, might benefit from rising rents quite quickly.”
3. If you’re looking for a “Many commercial leases, particularly outside the United States, include explicit inflation linkages, with rent escalators related to a publicized inflation rate.”
REIT dividends tend to grow faster than inflation as a result of these variables, as detailed in the same article:
We expect REITs to produce above-average dividend growth over the next three years, similar to what we witnessed post-2009, following pandemic-driven dividend reduction in 2020. Despite the fact that the pandemic has hastened changes in how real estate is used (some for the better, others for the worst), we believe REITs’ ability to grow rents faster than inflation remains unaltered.
At the risk of seeming repetitious, I really want to emphasize this: REITs provide investors with some inflation protection because real estate rental rates rise in lockstep with the price of goods and services. As I recently stated in an essay, “How to Think About Inflation Like a REIT”:
Overall, REITs are well-positioned to gain from rising inflation while also delivering appealing current income streams that should rise over time.
Whether inflation rises or falls as a result of unexpected pandemic-related issues, REITs provide investors with reliable income streams. That’s why, happily, I’m sticking with them.