Will REITs be a good investment in 2024?
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.
Rates boosting REITs
Among the strongest factors shaping the REITs market as we move into 2024 is the likelihood of federal interest rate cuts. If those do materialize, we could see a lot of growth for the sector. According to Sakwa, that scenario holds true if the Federal Reserve cuts rates multiple times.
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 outlook for the commercial real estate (CRE) market in 2024 suggests a cautious optimism tempered by concerns over capital costs, bond market volatility, lower valuations, and maturing debt.
Only 9.55% of REITs had a positive total return in January. During January 2023, the average REIT had a strong +11.77% return, whereas REITs had a much rougher start to 2024 with a -5.72% total return.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
The valuation divergence between REITs and private real estate will likely converge in 2024, making REITs an attractive option for investors. Solid balance sheets will enable REITs to navigate ongoing economic uncertainty while providing an advantage in terms of acquisitions and growth.
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.
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.
Why REITs should rally in 2024?
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.
As the REIT industry continues to evolve, its future growth prospects remain promising. According to the reports, the global REIT market is projected to reach a staggering $5.8 trillion by 2030, growing at a CAGR of 7.1% during the forecast period of 2023-2030.
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.
Best Time to Sell Your House for a Higher Price
April, June, and July are the best months to sell your house in California. The median sale price of houses in June 2023, was $796,400, which is expected to grow more in 2024. However, cities like Arcadia and San Mateo follow an upward trend throughout the year.
Many prospective homebuyers chose to wait things out in 2023, in the hopes that 2024 would bring a more advantageous market. But so far, with mortgage interest rates still relatively high and housing inventory stubbornly low, it looks like 2024 will remain a challenging time to buy a house.
Wall Street analysts ultimately expect S&P 500 companies to grow earnings by roughly 11% in 2024. And by the fourth quarter, growth is expected to have roughly evened out, with the top 10 stocks expected to see growth of 17.2% while the other 490 companies see growth of 17.8%, according to FactSet data.
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.
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.
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.
Commercial property investments can provide a high and potentially rising rental income and some capital growth over the long term. REITs often have long-term lease agreements with tenants, which can help to make rental income and dividends paid relatively reliable.
What is the expected return of REITs?
Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.
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.
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.
While they provide a compelling set of benefits, it should be noted that, like any investment, non-traded REITs come with risks, including illiquidity, loss of principal, real estate risks, and more.
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.
