The real estate business has been extraordinarily volatile over the last year, and this heightened volatility has had a direct impact on the real estate investment trusts (REITs) market. Most REIT and REIT-related firms have suffered dramatic price movements in positive and negative directions during the previous twelve months.
It may be challenging to navigate the ever-changing real estate investing market. Various factors might influence the value of REITs, including market demand, legislation, and changing customer tastes. Additionally, it is essential to understand that not all REITs move in the same way; at the same time, some, such as those with an emphasis on investing in multifamily homes or warehouses: maybe see the value rise, while others, such as those primarily engaged in conventional office buildings, may be going in the other direction.
Regardless, making an effort to learn more about the REIT market (and the real estate business in general) can enable you to make educated investment decisions. This post will explore the most crucial aspects of REITs, including the advantages and disadvantages of investing in REITs and how REITs may perform.
REIT – Real Estate Investment Trust
REITs are businesses that own or finance income-generating real estate across a variety of property sectors. Since the 1960s, REITs have been available to all interested Americans.
A REIT’s principal objective is to generate profits for its investors. Instead of just flipping buildings (as some other estate-focused corporations do), REITs seek assets that might provide future income streams that exceed future costs: This may include residential rental properties, business rental properties, and industrial rental properties, among others. Typically, profit has created by recurring rentals and asset appreciation and growth. Some REITs are publicly traded and registered with the Securities and Exchange Commission (SEC).
What Benefits and Drawbacks Come with Investing in REITs?
As with any speculative venture, when investing in REITs offers advantages and disadvantages.
The advantages of investing in REITs consist of:
Liquidity
Instead of investing directly in real estate (often illiquid), REITs allow investors to acquire a highly liquid indirect position in the market.
High Demand
Actual estate is an asset that will always be in demand and will always have limited supply owing to its tangible (real) character.
Total Return
REITs may create returns in various methods, including asset appreciation, rental income, and property improvement.
Strong Returns
REITs often beat the overall stock market (as measured by the S&P 500 Index) without incurring a disproportionate amount of additional risk.
However, some of the disadvantages of investing in REITs include:
Dividend Taxes
Currently, dividends from REITs have not considered “qualified dividends,” so you may find yourself paying more taxes than anticipated.
Investing for the Long Term
Real estate development may be a lengthy process; it may take many years for properties to generate positive net returns.
Uncontrollable Variables
REITs may underperform for various reasons, including property-specific characteristics, legislative changes, and more significant economic downturns.
What Was the Performance of REITs In 2020?
2020 was very unpredictable for most industries, and REITs were no exception. Values of REITs specializing in hotels and offices were significantly affected by abrupt increases in vacancy rates. In contrast, the rise of multifamily and industrial buildings was remarkably steady.
In essence, a REIT’s performance in 2020 largely depended on how much its properties connected to the COVID-19 outbreak.
Overall, REITs managed to have a relatively prosperous 2020, particularly towards the year’s close. According to a September 2020 projection, “after experiencing losses in five of the first seven months of the year, the REIT sector rebounded in August with an average total return of +3.16 percent.”
Large-size REITs significantly outperformed their small-cap counterparts at the beginning of the year, but by the end of the year, small-cap REITs had taken the lead. Given the erratic character of the year as a whole, this is not unexpected (during periods of volatility, small-cap REITs tend to experience higher and lower lows).
With the broader reopening of the economy, many homes whose prices dropped sharply at the beginning of the year expect a highly anticipated rebound.
How Will REITs Probably Perform?
Overall, the REIT sector has already shown excellent outcome. According to recent sources, “REITs continued their winning run with a +3.02 average total return in March.” In addition, about three-quarters (74.73 percent) of REIT equities had positive returns in March, making it one of the best-performing months for REITs in recent memory.
Several factors will likely drive REITs to continue their ascent throughout the year. The combination of heavy government investment and still-low (but not as low as they formerly were) borrowing rates may assist in maintaining strong demand. In addition, the relaxation of limitations and an anxiously anticipating populace would likely lead to a surge in demand for office space, retail space, and other areas geared toward people. Even if the market does not return to pre-epidemic levels, the vast declines recorded at the onset of the pandemic provide enough potential for expansion.
However, there are still grounds for caution when investing in REITs. Once promising, REITs may perform poorly due to delayed income sources. In addition, anticipated near-term inflation may challenge investors since rents would undoubtedly increase (which may stifle demand). Considering this, no one should consider REIT investments risk-free.
Overall, it is evident that the REIT market reversed course towards the close of 2020 and is experiencing a prosperous start. With a diversified market strategy, a willingness to evaluate company-specific risk, and tenacity, investing in REITs may still be very successful.
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