An adage among real estate investors basically says that you cannot build any more land. While you can always build higher, you still need the land. One of the best assets that most investors are underweighted on is real estate. Those who own a home are technically real estate investors, but home ownership does not produce any income, unless you have rental homes, which can be very capital intensive, not to mention time-consuming.
The inflation conditions this year are the worst since the early 1980s, and there is no reason to expect things will improve any time soon. In fact, according to the National Federation of Independent Business, about 40% of U.S. small businesses intend to raise prices by 10% or more this year. Add in spiraling food and gasoline prices, and the picture for the rest of 2022 looks increasingly grim.
Many investors are concerned that real estate investment trusts (REITs) will get hit hard in a rising interest rate environment, which has begun in earnest as the Federal Reserve raised the federal funds rate by 50 basis points, and similar or even bigger hikes are expected in June and July, as well as the rest of the year.
The reality is REITs have performed well. In a recent publication, the National Association of Real Estate Investment Trusts had this to say:
Historically, REITs have performed well during periods of rising long-term interest rates with average four-quarter return in periods with rising rates of 16.55% compared to 10.68% in non-rising rate periods from the first quarter of 1992 to the fourth quarter of 2021. Additionally, REITs outperformed the S&P 500 in half of the periods when Treasury yields were rising. The positive association that has historically been observed between periods of rising rates and REIT returns is consistent with an improvement in the underlying fundamentals.
Jeffrey Spector of BofA Securities is one of Wall Street’s top REIT analysts, and he has put together a list of the firm’s top picks across the many sectors in which REITs are prominent. This was noted in a report discussing the sector:
With BofA indicators signaling late cycle, we are recommending investors focus on high quality REITs. Quality is a key attribute to stock outperformance late cycle. We believe higher quality REITs will offer the best earnings and distribution growth in 2022. Quality REITs have the following attributes 1) pricing power/inflation protected income; 2) ability to beat & raise leading to upward Street revisions; 3) multi-year earnings visibility based on secular drivers of growth; 4) strong global inflows resulting in rising asset values & steady / lower cap rates despite higher rates; 5) strong balance sheets; and 6) visible/ above average distribution growth.
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