Will REIT stocks recover?
With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year. Ultimately, the decision on whether or not to buy REITs will depend on the specific circ*mstances and risk tolerance of each investor.
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.
The global REIT market is experiencing steady growth. According to the recent market reports, the market size is reaching an impressive $3.5 trillion in 2022 and is estimated to reach USD 4.2 trillion by 2027, growing at a Compound Annual Growth Rate (CAGR) of 2.8% from 2022.
REIT 12 Months Forecast
Based on 31 Wall Street analysts offering 12 month price targets to REIT holdings in the last 3 months. The average price target is $28.05 with a high forecast of $31.48 and a low forecast of $24.01. The average price target represents a 13.04% change from the last price of $24.81.
The portfolio was much more resilient in the tough markets, particularly in 2022 and 2023. In both years, the REIT+ (100% REITs) portfolio outperformed the benchmark by 1.7% in 2022 and 1.5% in 2023 YTD.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
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.
He and Charlie Munger, vice-chairman of Berkshire Hathaway, actively dismissed it for many years. However, Buffett has recently invested in REITs as part of his passive income strategy.
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 90% rule for REITs?
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.
According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
Because REITs use debt to purchase investments, rising interest rates could mean these companies would have to pay more interest on future loans. This could in turn reduce their return on investment. Because of this, REITs could potentially lose value when interest rates rise.
After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.
Higher interest rates pose a problem for Realty Income
First, like most REITs, Realty Income relies on borrowing money to buy new properties and expand its business. As borrowing costs go up through higher interest rates, it becomes more expensive for the company to finance its expansions.
Key Points. 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.
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.
Real estate stocks have been a bust so far in 2024. The rate-sensitive sector has underperformed the broader stock market this month as investors worry the Federal Reserve won't bring down the cost of borrowing as quickly as markets hope.
They historically offer competitive long-term performance, with consistent returns compared to stocks and bonds. REITs provide attractive income through dividends, liquidity, transparency, and diversification, enhancing risk-adjusted returns.
REITs tend to be popular among income investors because they're required to distribute at least 90 percent of their taxable income as dividends to shareholders. So, for investors, there are two ways to make money from REITs: Appreciation when the REIT's share price goes up and regular quarterly dividend payouts.
Why Warren Buffett doesn t invest in REITs?
“We don't have any competitive advantage over experienced real estate investors in the field." Buffett himself said something similar and extended this to REITs: I think [real estate] tends to be more accurately priced, particularly more developed real estate, most of the time...
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.
| # | Name | M. Cap |
|---|---|---|
| 1 | Prologis 1PLD | $95.91 B |
| 2 | American Tower 2AMT | $80.10 B |
| 3 | Equinix 3EQIX | $70.57 B |
| 4 | Welltower 4WELL | $53.86 B |
REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.
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.
