Why REITs Can Be a Good Investment During a Recession  - Upside Avenue (2024)

FAQs

Why REITs Can Be a Good Investment During a Recession  - Upside Avenue? ›

REIT investments, especially those that are non-traded, involve holding onto the investments with a long-term outlook. This makes them a less volatile option than many other types of equity investments that are simply focused on quarterly returns. The stock market is extremely volatile during recessions.

Another sector sensitive to interest rate changes is real estate, for much the same reason, according to Chisholm. “REITs and other shares in the real estate sector tend to do well when rates drop,” he says.

During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

REIT Stock Market Performance and Interest Rate Environment

Historically, there has generally been a positive correlation between rising interest rates and REIT returns over extended periods. This correlation exists because rising rates typically reflect improvements in underlying economic fundamentals.

Investing in certain types of REITs, such as those that invest in hotel properties, is not a great choice during an economic downturn. Investing in other types of real estate such as healthcare facilities or retail is a great way to hedge against a recession.

There are three key reasons to invest in listed REITs right now, starting with the fact that REITs have outperformed stocks and bonds when yields and growth move lower. Demand is healthy while supply is constrained, and REIT valuations relative to the broader equity market are meaningfully below the historical median.

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.

Investors should be aware that non-traded REITs may have high up-front fees or sales commissions. These REITS may also have annual management fees, and the management team may take a percentage of profits in the form of “promoted interest”. Together these fees can put a dent in the ultimate return that investors see.

Risks of Non-Traded REITs

Non-traded REITs or non-exchange traded REITs do not trade on a stock exchange, which opens up investors to special risks such as: Share Value: Non-traded REITs are not publicly traded, meaning investors cannot research investments. As a result, it's difficult to determine the REIT's value.

What is the 90% rule for REITs? ›

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

Rough Year for Global REITs, Despite Strong December

A 9.66 percent increase in December did little to mask a difficult year for the FTSE EPRA/NAREIT Global Real Estate Index, which finished 2008 down 47.72 percent.

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

Types of investments to consider during a recession

Bonds: Fixed-income assets like bonds often outperform in a recession because of their lower risk levels combined with reliable income, an attractive feature during a down economy.

Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.

Rate-sensitive companies such as small banks, real estate investment trusts (REITs) and heavy borrowers can benefit substantially from lower rates. They also help stock prices, with investors discounting future earnings at lower rates, boosting the present value of those future cash flows today.

Mortgage REITs

They earn income from the interest on these investments. Mortgage REITs are highly sensitive to interest rate changes due to the nature of their business model. Rising interest rates can reduce the value of existing mortgages and increase the cost of new borrowing, squeezing margins.

REITs posted total returns north of 5% for the month, although they remain in negative territory year-to-date. On the heels of a rough month of April, the FTSE Nareit All Equity REITs Index mounted a comeback in May with total returns up 5.29%.

REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.