Do REITs do well during recession?
The FTSE Nareit All Equity index, consisting of REITs that exclude mortgages, generated a 15.9% annualized return during recessions and 22.7% in the year following the end of a downturn, according to the National Association of Real Estate Investment Trusts.
When rates rise, REITs fall. At least that's the conventional wisdom. In recessions, interest rates fall. Normally bullish for REITsâconsider them a âsecond-levelâ bet on a bond bounce.
Even with inventory levels driving up prices, investing in real estate during a recession could still result in significant long-term returns.
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own â and some real estate sectors may be better positioned than others.
The strong finish kept domestic REITs in line with the broader markets in 2008. The S&P 500 dropped 37 percent for the year, while the NASDAQ Composite fell 40.54 percent. The Russell 2000 was down 33.79 percent, and the Dow Jones Industrial finished 2008 down 33.84 percent.
Real Estate Investment Trusts, vehicles that pay out most profits as dividends, are better positioned to weather high interest rates and recession fears than private equity real estate or stocks, according to analysts at Bank of America and CenterSquare Investment Management.
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.
Commercial Properties
As with residential rentals, the ideal properties are those that need few upgrades and already have long-term tenants. For short-term investments, location is also important. Recessions generally have less effect on high-income neighborhoods, so focus your efforts there.
Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Why not to invest in REITs?
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
The trend started to reverse in late 2023, with the REITs posting a 17.9% return for the fourth quarter. And it will likely continue in 2024 as multiple factors converge to create a favorable environment for the sector, according to REIT fund managers.
April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
U.S. REITs Performance in Inflationary Environments
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.
REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable. There is a difference between the dividends paid by stocks and REITs though.
Right now, REITs (VNQ) are at an inflection point and time is running out for investors. But now as we head into 2024, we expect the polar opposite and this should lead to an epic recovery across the REIT sector. The Fed expects at least 3 interest rate cuts in 2024 and the market is predicting even more.
Bad REIT earnings tend to run afoul of Section 856, which provides that at least 95% of a REIT's gross income must be derived from ârents from real property.â It also provides that at least 75% of its gross income must be derived from that source.
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.
Summary. REITs have access to capital and are acquiring assets, making it a good time to invest. REITs historically rebound when interest rates pivot and have the potential for rent growth.
What is the lifespan of a REIT?
During the REIT operation period that can last up to 7 to 10 years, the sponsor manages its properties to produce an income stream. REIT management seeks to monetize the portfolio in an effort to realize a capital gain for investors, although there's always the risk of a loss instead.
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
Treasury Bonds
Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments. That's because they are backed by the U.S. government, which is deemed able to ensure that the principal and interest are repaid.
In a housing market recession, mortgage rates drop and home prices typically do as well (though not always). If you're considering buying during a recession, certain habits work well in any market. Make sure you're ready, get preapproved, and watch the market and interest rates.
Essential property types such as multifamily housing or healthcare facilities that will continue to be in demand during a recession remain a good investment. Geographic factors can be a significant characteristic to understand in the recession-proof market.
