REITs 2023: Maintaining Solid Footing Amid Economic Uncertainty (2024)

FAQs

REITs 2023: Maintaining Solid Footing Amid Economic Uncertainty? ›

However, our review of REIT balance sheets and debt suggests that REITs are well-positioned for economic uncertainty in 2023 because of their strong balance sheets. They are entering the new year with leverage near historical lows, and well-termed, mostly fixed-rate debt and very low current interest expense.

Pierzak, senior vice president of research for the National Association of Real Estate Investment Trusts. With the Federal Reserve signaling the end of its tightening policy and teasing potential rate cuts in 2024, the Nareit All Equity REIT Index posted total returns of 8.9% in December and finished 2023 up 11.4%.

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.

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.

Interest rate risk

The biggest risk to REITs is when interest rates rise, which reduces demand for REITs. 6 In a rising-rate environment, investors typically opt for safer income plays, such as U.S. Treasuries. Treasuries are government-guaranteed, and most pay a fixed rate of interest.

REITs are entering this period of slower economic growth with strong operational performance and are well-positioned for economic uncertainty in 2023. Our analysis of CRE and REITs notes that REITs had impressive operational results with record high earnings during 2022, despite their lower stock market valuations.

The strong fourth quarter carried over to an 11.3% return for 2023 as a whole for the REIT-focused index, underperforming the S&P 500's 26.3% return for the year. All Dow Jones US Real Estate sector indexes closed the fourth quarter in the black.

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.

With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.

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.

How long should I hold a REIT? ›

Is Five Years the Standard "Hold" Time for a Real Estate Investment? Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential.

REITs historically perform well during and after recessions | Pensions & Investments.

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.

REIT Stock Performance and the Interest Rate Environment

Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals.

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

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.

Nareit lays the blame for the decline in the price of publicly traded REITs largely at the feet of rising interest rates. In a bid to combat inflation, the Federal Reserve hiked rates from near zero to between 5.25% and 5.5% in 2022 and 2023.

Bottom line. Investors eyeing REITs may find a potential recovery ahead. 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.

Here's a look at how this index has performed over the years versus the average stock market return (measured using the S&P 500's total returns): Data source: Nareit and YCharts (2024). REITs have outperformed the S&P 500 over the past 20-, 25-, and 50-year periods.