Will real estate stocks recover?
Since last year, experts have predicted that a rebound in commercial real estate is just around the corner. Earlier this year,
But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.
Higher interest rates have a dramatic negative impact on the value of existing real estate, as it costs more for landlords to service the debts on their properties. In addition, as the yields on alternative investments, such as government bonds, go up, the value of real estate stocks reduces proportionally.
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.
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.
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.
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.
Key Takeaways
U.S. real estate stocks tanked Wednesday after stubbornly high inflation data amplified concerns interest rates will remain elevated for some time and further distress the financial plumbing of America's property sector.
The real estate market won't crash, and it especially won't crash in high-demand areas (Southern California, the Bay Area, Atlanta, SoFlo, Colorado, etc.). We'll likely see a steep-ish correction in "second-tier" markets, like the ones in Texas, Tennessee, and the Rust Belt (Pittsburgh comes to mind).
Zillow stock sinks after realtor settlement paves way for lower commissions.
Can REITs go to zero?
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
After a volatile couple of years, we're optimistic about the potential for a calmer year in 2024. Given the strong fundamentals and compelling long-term drivers among certain REIT subsectors, we think the coming year could be constructive for patient real-estate investors.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
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.
REITs should generally be considered long-term investments
This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.
"Billionaire CEOs like [Jeff] Bezos, [Mark] Zuckerberg, Jamie Dimon, and the Walton family are selling off massive amounts of their own stocks, and analysts think the CEOS may be bracing for an economic downturn," he said, adding, “An overheated stock market continues to climb to new heights as investors feed that ...
Thus, between falling interest rates, the coming decline in new deliveries, and attractive relative valuations, REITs appear to be poised for a strong rally over the next few years.
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
What this means is that REITs are ideal borrowers for banks. They are exactly who they want to do business with because they know that the risk of a REIT bankruptcy is extremely low. Just look at the past. There have been very few REIT bankruptcies over the past 50+ years.
At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years. If you invested more money into REITs or those producing a higher average annual return, you could become a millionaire even faster.
What is bad income for REITs?
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
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. Several individual REITs delivered significantly higher returns than the S&P 500.
Generally, stocks have proven to be more profitable than real estate. For example, U.S. housing prices have grown 5.4% year-over-year from March 1992 to June 2023, according to data analytics firm CEIC. During the same period, the S&P 500 has increased 8% in price.
But, the real estate industry seems to suffer a lag effect from a stock market correction no matter how far rates fall — it is just a matter of how long the effect lasts. After stocks bottomed out in March of 2020, for example, rates plummeted, and the mortgage industry exploded with refis.
Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation. There can be tax advantages to property ownership. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $750,000 in mortgage debt.
