Would You Invest In A REIT Right Now?
REITs dropped 5% following Wednesday's CPI news. Rising inflation can put pressure on REITs due to potential interest rate hikes. Do you think their current depressed valuations and low AFFO multiples present a buying opportunity?
Based on the WSO Dataset, investing in REITs during times of inflation and potential interest rate hikes requires a nuanced approach. While it's true that rising inflation can pressure REITs, primarily through increased borrowing costs and potentially slower economic growth affecting property values and rental incomes, there are several factors to consider:
Sector Diversification: Not all REITs are equally affected by inflation. For example, those in sectors like industrial, logistics, and some areas of residential may continue to perform well due to high demand and limited supply. It's crucial to analyze the sectors that the REITs are invested in before making a decision.
Interest Rate Sensitivity: REITs are often perceived as being sensitive to interest rate hikes, which can increase their borrowing costs and affect their dividend payouts. However, if a REIT has locked in low-interest rates for its debt or operates in a sector with strong rental growth, it may be better positioned to withstand higher rates.
Valuation and AFFO Multiples: Depressed valuations and low Adjusted Funds From Operations (AFFO) multiples can indeed present a buying opportunity, especially if the REIT's fundamentals remain strong. Investors should look for REITs with solid balance sheets, good liquidity, and the ability to maintain or grow dividends.
Long-Term Perspective: Investing in REITs during uncertain times requires a long-term perspective. Real estate is a cyclical industry, and while short-term challenges exist, the long-term outlook can be positive for well-positioned REITs.
Inflation Hedge Potential: Some types of real estate can act as an inflation hedge, as they allow for rent increases that can keep pace with or exceed inflation. This characteristic can protect and potentially enhance the income stream from these investments over time.
In conclusion, while the current environment poses challenges for REITs, it also offers opportunities for discerning investors. A careful analysis of the REIT's sector exposure, interest rate sensitivity, valuation, and long-term prospects is essential before making an investment decision.
Sources: Hiring Freezes, Is debt more attractive than equity right now?, I'm long office properties, Why wouldn't a fund do a leveraged buyout of an undervalued REIT?, Moving to Buy-Side in a Recessionary Environment
Maybe for a long long hold, it'll take some time to rebound. It's easier to buy Tech stocks going into correction territory right now. Unless the REIT pays a high DVD, you are fine with that. I had the same thought about Regional banks, and they are still depressed. At some point, they will rebound, and a Regional Bank ETF will be a nice hold with a DVD payout. Banks at least have the opportunity to rebound like NYCB, with HYSA being the country's highest in gathering deposits to float through their unloading of defaulting CRE. REITS are underwater and do not have as sophisticated investment management, and it'll take longer for those that survive to pull out. But yes, watch and wait. If you want to but this slight dip and hold long time go for it, you might get like a 3-5% return in a couple weeks. But if you want big returns, it'll take time.
If you want exposure to REITs, buy Hoya RIET ETF. Holdings include over 100 equity and mortgage REITs and pays a monthly dividend around a 10% annualized yield.
Most public REIT implied cap rates are well above where private market transactions are going. Look at Blackstone's acquisition of AIRC. Sure you will never get big returns in REITs but as a real estate person you probably have realistic return assumptions. Either the private markets are wrong on valuation or the public markets are right. For sure would rather buy a public REIT than a private REIT like BREIT etc. due to the higher fees, NAVs that are probably overstated at the private REIT and lack of liquidity. I'm a public equity guy and not a real estate person so I don't know crap compared to someone in Real Estate. But that's how I look at it, public REITs have some margin of safety built in right now
If you believe in value appreciation story (and have a long time horizon), then yes REIT's are an attractive option.
If, on the other hand, you want yield/income, then I personally would park money in a high yield savings account (or just buy treasuries), as I personally don't believe REIT's are offering appropriate yield premium over risk free rate.
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