Inflation is an important economic indicator because it can impact the prices of goods and services. Investors who are interested in real estate investment trusts (REITs) may wonder: Do REITs do well during times of inflation? Let’s take a closer look.
Do REITs Do Well During Inflation?
It’s no secret that inflation can wreak havoc on investments. Fortunately, REITs have historically outperformed the broader market during periods of inflation.
In fact, according to market data from NAREIT, the average REIT has delivered annualized returns of 12.9% since 1972, compared to just 9.6% for the S&P 500 Index.
There are a number of reasons why REITs tend to do well during periods of inflation:
- Since REITs own physical property, their assets increase in value along with the overall level of prices in the economy.
- Income is generated since property values tend to increase, and as inflation increases, so does the amount of money that tenants are willing to pay for rent.
- REITs typically have long-term debt contracts in place with fixed interest rates. This means that as inflation rises and the cost of borrowing goes up, REITs are not immediately affected since their debt payments stay the same.
What Will Happen to REITs When Interest Rates Rise?
When interest rates rise, it’s often assumed that REITs will suffer. After all, higher rates mean higher borrowing costs for REITs, which could eat into their profits.
But not all REITs are created equal, and in fact, some types of REITs actually perform quite well when rates rise. Let’s take a look at three different types of REITs and how they might be affected by rising interest rates.
Mortgage REITs are perhaps the most likely to be hurt by rising rates. That’s because these REITs invest in mortgage-backed securities (MBS), which are essentially loans that are bundled together and sold to investors.
When interest rates rise, the value of MBS usually falls, since they become less attractive to new investors. This can lead to losses for mortgage REITs.
Equity REITs, on the other hand, tend to benefit from higher rates. That’s because these REITs own and operate income-producing real estate companies, such as office buildings, shopping centers, and apartment buildings.
When rates rise, equity REITs often see their profits increase, since they can raise rents and still attract tenants with the higher yields they offer. Higher rates also tend to boost the values of properties owned by equity REITs.
Hybrid REITs are a mix of the two other types of REITs. These REITs usually have a portfolio that includes both MBS and real estate properties.
While higher rates can hurt the MBS side of their business, they can also boost profits on the real estate side. As a result, hybrid REITs tend to be less affected by rising rates than either mortgage or equity REITs.
How Do REITs Respond to Inflation?
REITs are a type of investment vehicle that allows investors to pool their money together to purchase and manage income-producing real estate.
Because REITs typically focus on owning and operating commercial real estate such as office buildings, shopping centers, warehouses, and apartments, they can be affected by inflation in a number of ways.
In general, REITs are considered to be fairly stable investments during periods of inflation. This is because the income generated by REITs is typically tied to the rents that tenants pay, which tend to increase along with the overall cost of living.
There also tends to be long-term leases in place that protect REITs from sudden drops in rent payments.
However, there are some risks that REITs face during periods of inflation. For example, if the cost of building materials and labor increases faster than the rate of inflation, it can eat into profits.
If interest rates rise sharply, it could make it more difficult for REITs to borrow money for new acquisitions or developments.
Are REITs Good Inflation Hedges?
Yes, REITs can be a great inflation hedge when it comes to protecting your portfolio from inflation. It can help preserve your purchasing power and provide a steady stream of income.
REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends, which makes them ideal for investors looking for regular income.
For what tends to be less volatile than other asset classes, REITs can help provide stability during periods of inflation.
Are REITs a Good Investment?
Yes, REITs can be a good investment for a number of reasons. First, it is a great way to invest in real estate without having to actually purchase a property.
They offer investors the chance to receive income from dividends and potentially capital appreciation if the value of the underlying property increases.
REITs can also provide diversification benefits since they tend to move differently than stocks in general and are less volatile than the stock market as a whole.
What Are Some Downsides to REITs?
Like any investment, there are risks involved with investing in REITs.
For one thing, they are subject to the same risks as any other publicly traded company, including the risk of fraud and mismanagement.
REITs are also subject to the risks inherent in the real estate market. For example, if the value of the properties owned by a REIT decreases, the value of the REIT itself will likely decrease as well.
Because REITs typically pay out high dividends, they may have to cut their dividends if their income decreases. This could happen if the properties experience lower occupancy rates or rental rates.
They also may be less liquid than other investments, which means it may be difficult to sell your shares when you want to.
How Much of Your Portfolio Should Be in REITs?
There is no definitive answer, but most experts recommend between 4% and 13%. This range takes into account the higher volatility of REITs relative to other asset classes, as well as their potential for providing diversification benefits.
Of course, the amount you ultimately decide to invest in REITs will depend on your individual goals and risk tolerance. If you’re looking for stability and income, you may want to keep your allocation on the lower end.
But if you’re willing to accept more volatility in exchange for the chance of higher returns, you may want to increase your allocation.
Whatever you decide, be sure to monitor your REIT investments carefully. The sector can be volatile, and there are always risks associated with owning any type of property.
However, with a little research and due diligence, REITs can be a great addition to any portfolio.
Will REITs Do Well in 2022?
It’s been a tough few years for REITs, but there are signs that things may be turning around, so let’s take a look at what might be in store for REITs this year.
The recent pandemic took a toll on many real estate markets, and the ensuing years have been marked by slow growth and uncertainty.
Rest be assured, there are still signs that things may be improving. The economy is slowly recovering, and the real estate market is showing signs of life, which could mean good things for REITs in the coming year.
There are a number of factors that could contribute to a rebound in the REIT sector. When inflation is high, landlords can raise their rent to cover rising costs. This can provide a boost to REITs that own income-producing properties.
The recent rise in interest rates could also be good news for REITs. Rising rates tend to increase the cost of borrowing, which can make it more difficult for investors to purchase properties.
This can put upward pressure on prices, which is good news for REITs with properties that are increasing in value.
A strong economy is good for the real estate market, and will ultimately benefit REITs.
The job market is slowly improving, which means that more people are likely to have the disposable income necessary to afford rent or a mortgage payment.
This could lead to increased demand for rental units and other real estate assets. All of these factors could lead to a better environment for REITs this year.
Do REITs Outperform the S&P 500?
Yes, REITs outperformed the S&P 500. In fact, over the long run, they have outperformed the S&P 500 by a wide margin.
There are a number of reasons for this outperformance. First, REITs tend to be less volatile than the overall stock market. This means that they provide investors with a more stable investment and generate returns that are more consistent over time.
Second, REITs are required by law to pay out 90% of their taxable income as dividends to shareholders. This makes them an attractive investment for income-seeking investors who want to receive regular cash payments.
Lastly, REITs offer exposure to a wide variety of real estate assets, including office buildings, retail centers, apartments, and warehouses. This diversification can help to protect investors from the risks associated with investing in a single property type.
These factors have helped REITs to generate returns that are significantly higher than those of the overall stock market. As such, they offer investors an attractive way to boost their portfolio returns.
Where Should I Invest If Inflation Is High?
If both inflation and Consumer Price Index are high, it means that prices for goods and services are rising. This can erode the value of your investments, so you’ll want to be extra careful about where you invest your money.
One option is to invest in real estate. This is because while prices for homes and other properties can go up along with inflation, real estate generally keeps pace with or outpaces inflation.
Another option is to invest in commodities. Commodities are natural resources like gold, oil, and agricultural products. They tend to do well when inflation is high because they become more valuable as the price of goods and services goes up.
Investing in stocks can be a good way to protect your portfolio from high inflation periods as well. While stock prices can go up and down in the short-term, over the long-term they tend to keep up with inflation.
Of course, you don’t have to limit your investments to just these three asset classes. But, if you’re worried about inflation eating into your investment returns, these are three options worth considering.
Final Thoughts: Do REITs Do Well During Inflation?
If you’re looking for an investment that has a history of outperforming during inflationary periods, then REITs should definitely be on your radar.
This may be due to the defensive nature of real estate, since it’s one asset class that people need and will always demand, regardless of economic conditions.
REITs are good inflation hedges and should continue to do well in 2022. In fact, over the past year or so, REITs have outperformed the S&P 500, proving that they are a valuable investment option for those looking to protect their portfolios from the ravages of rising prices.