Some people consider direct real estate investments to be an inflation hedge. But direct real estate investing and REIT (real estate investment trust) investing are two very different worlds. Are REITs also considered an inflation hedge? That’s what we’ll explore in this article.
Inflation and Real Estate?
Real estate has historically done well during inflationary periods. If the costs of construction and materials all increase as inflation increases, this causes the final product to increase as well. It isn’t just new construction that can increase with inflation. The real estate market as a whole historically increases, rents included.
However, once the Federal Reserve is well into a rate hiking campaign, real estate valuations can come down. In 2006, interest rates hit 5.25%. The median price of homes peaked in Q2 of 2006. They went up again in Q1 of 2007 before collapsing.
With the FED currently hiking interest rates again, we are seeing home prices flattening out in the second half of 2022 and even declining in some areas. The 30-year fixed rate mortgage is hovering just under 7%, helping to decrease demand.
But if we talk specifically about REITs, are they good investments during inflationary periods?
How Have REITs Performed When Inflation is Increasing?
There are many different types of REITs to choose from, and all can perform differently during inflationary periods.
Different types of REITs:
- Equity
- Mortgage-backed
- Hybrid
- Publicly traded
- Private
- Public non-traded
Investors buying a 10-year bond are locked into a rate for ten years. If inflation goes up, these investors’ bonds aren’t going to do anything. So these bonds offer no inflation protection. If the FED is also hiking rates during this time, then new 10-year bonds will be more valuable since they’ll pay a higher rate.
For the above reasons, REITs with shorter-term leases (i.e., 1-2 years) offer more flexibility. It also allows those specific REITs to reset and attempt to keep up with the pace of inflation.
Mortgage REITs are fixed-rate, which means investors can be locked into a long-term rate. Most equity REITs do not have this issue.
REIT investors have an expectation that a REIT’s dividends will keep up with inflation. Historically, this has worked well. However, we can’t forget, at least for publicly-traded REITs, that they are still traded like stocks. As interest rates rise, they can depress the price of these REITs. So while dividends may climb with interest rates, the price of publicly-traded REITs may decline.
Historically, REITs are one of the better-performing sectors during inflationary periods. We can see this in the following image. You’ll notice REITs are in the upper right area, showing they are outperformers during periods of high inflation. In contrast, check where mortgage REITs are in the bottom left.
Source: https://www.hartfordfunds.com/insights/market-perspectives/equity/which-equity-sectors-can-combat-higher-inflation.html
There’s no guarantee that if you buy a REIT for inflation protection that it will perform well. But buying certain REITs has historically worked to hedge high inflation.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
There are risks associated with these types of investments and include but are not limited to the following:
- Typically, no secondary market exists for the security listed above.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
FAQs
As interest rates rise, they can depress the price of these REITs. So while dividends may climb with interest rates, the price of publicly-traded REITs may decline. Historically, REITs are one of the better-performing sectors during inflationary periods.
Do REITs do well in a recession? ›
REITs Outperform Stocks During Recessions
Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.
Are REITs good in rising rates? ›
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.
What is the best investment to beat inflation? ›
Gold investments have proven to beat inflation rates as it has been observed that gold prices rise with an increase in inflation rates. Note – Gold jewellery involves various costs like making charges, storage & insurance costs, GST, etc.
Is it a good time to invest in REIT? ›
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.
What is the downside of REITs? ›
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
Are REITs safe from inflation? ›
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.
Will REITs recover in 2024? ›
Taking the REIT Approach. Given this, analysts now expect REIT returns to surge in 2024. For example, real estate-focused investment manager Cohen & Steers predicts that REITs could deliver returns in the 10% to 13% range, above their historic average.
Do REITs outperform the S&P 500? ›
Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.
Why are REITs struggling? ›
Here's an explanation for how we make money . More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.
Inflation is most damaging to the value of fixed-rate debt securities because it devalues interest rate payments as well repayments of principal. If the inflation rate exceeds the interest rate, lenders are, in effect, losing money after adjusting for inflation.
Do 90% of millionaires make over 100k a year? ›
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
What stocks to buy during high inflation? ›
Best Inflation Protection Stocks of June 2024
| Company (TICKER) | Yearly EPS Growth Estimate (5-Year Average) |
|---|
| CMS Energy Corporation (CMS) | 7.6% |
| NiSource Inc. (NI) | 7.4% |
| Mondelez International, Inc. (MDLZ) | 7.4% |
| Pepsico, Inc. (PEP) | 7.2% |
6 more rowsJun 3, 2024
REITs Could Offer Investment Opportunities in 2024
Though 2022 and 2023 were challenging years for REITs, the recovery is likely on the horizon.
What is a good amount to invest in REIT? ›
The Cheapest Option: REITs—$1,000 to $25,000 or more
These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments.
What is the average return on a REIT? ›
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.
Is it a good idea to buy an investment property during a recession? ›
Meanwhile, real estate is a hedge against inflation and has tax advantages. Even with inventory levels driving up prices, investing in real estate during a recession could still result in significant long-term returns. If you're willing to hold on to your investment, you can benefit from the eventual market rebound.
How did REITs perform in 2008? ›
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.
Can REITs go broke? ›
REIT bankruptcies have indeed been a rarity since the REIT debacle of the mid-1970s, when high leverage and highly speculative real estate investments resulted in numerous REIT failures.
