Are REITs still a good investment?

Real estate investment trusts (REITs) have always been the stable and profitable income stocks. Of course, the pandemic has made us think that the value of real estate is bound to change and why not if Amazon has replaced stores, AirBnB has replaced hotels and telecommuting has replaced office work.

But do we really have to think about a crash? In reality, hotels, offices, and stores only make up 10% of REIT funds. There is a lot to choose from. Many REITs own cell phone towers, warehouses, data centers. These are properties that will not lose their value because of a pandemic.

But there is also another reason. In the stock market as in the economy, what you think about the future changes the future. For example, the higher interest rate is not very good for the owners because it reduces the profits. But, if we hear that the interest rate will stay the same (or even increase) investors will buy and increase the price of renting.Because less people can buy, the others have to accept the high rent. At the same time, if we hear that the interest rate will go down, people will buy less property and the high demand will cause high rents. In any case, prices are going up! 

This is not to say that REITs always benefit. Crises are often followed by the fall of REITs. Notably, the 2008 crisis caused a drop of more than 9% in REITs' return on investment. But, it was accompanied by almost the same fall of the stock exchange index. And if we count from 2006, the fall of the stock market index was even worse (see Figure 1). A similar effect occurred in 2020 due to the health crisis.  But if we look at the history, we can expect the profits to improve with the resurrection of the economy.

Figure 1. Average annualized total return over 10-year rolling period. Source: finugget.co.za

The other current concern is inflation. Here again, inflation can be seen as a threat because long-term commercial leases cannot always keep up with inflation. Nevertheless, inflation indicates higher real estate prices. And still, REITs usually manage to keep up or outperform (Figure 2).

Figure 2. REIT vs Inflation

In conclusion, crisis, inflation, interest rate and other factors cause volatility for REITs, but REITs have historically always caught up with the market and outperformed it.

* Opinions expressed here do not constitute an investment advice.