How are REITs doing in 2024?
As shown in the above table, since Oct. 19, 2023, the FTSE Nareit All Equity REITs Index is down 1.3% year-to-date in 2024, but has returned 20.5% since mid-October 2023.
The global REIT market is experiencing steady growth. According to the recent market reports, the market size is reaching an impressive $3.5 trillion in 2022 and is estimated to reach USD 4.2 trillion by 2027, growing at a Compound Annual Growth Rate (CAGR) of 2.8% from 2022.
According to UBS, global REIT earnings are forecasted to rise by over 10% cumulatively in 2024 and 2025. This growth rate already incorporates higher property taxes, payroll costs and higher interest expenses from raised rates.
Demand is healthy while supply is constrained. And REIT valuations relative to the broader equity market are meaningfully below the historical median. 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.
U.S. listed REITs, as measured by the FTSE NAREIT All Equity REIT index, are down 1.3% through the first quarter of this year. By comparison, the market value-weighted S&P 500 is up 10.6%, and the equal-weight S&P 500 has risen 7.9%. Out of the 11 S&P 500 sectors, real estate is the only one that is down year-to-date.
According to expert panelists at the recent Nareit REITworld annual conference, 2024 could be a year of opportunity for Real Estate Investment Trusts (REITs). They added a note of caution, however, that there are still headwinds affecting investor perspectives on REITs and capital markets in general.
Bottom line. Investors eyeing REITs may find a potential recovery ahead. With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year.
From the start of January 2022 to October 27, 2023, the S&P United States REIT Index declined 35%, while many nontraded REITs' valuations saw no such slump. Rising interest rates since the start of 2023 have hurt REITs because the cost of capital rises.
REIT Stock Performance and the Interest Rate Environment
Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals.
“To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.”
Why I don t invest in REITs?
However, REITs are not risk-free: they may have highly inconsistent, variable returns; are sensitive to interest rate changes are liable to income taxes may not be liquid, and can be dramatically affected by fees.
REIT 12 Month Forecast
Based on 30 Wall Street analysts offering 12 month price targets to REIT holdings in the last 3 months. The average price target is $27.50 with a high forecast of $30.39 and a low forecast of $24.28. The average price target represents a 9.53% change from the last price of $25.10.
Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.
REIT operational performance remained solid in the third quarter of 2023 (the most recent data available). Aggregate REIT NOI rose by 6.3% over the past four quarters, indicating that REITs have been keeping pace with inflation.
The past two years have been challenging for REIT returns, as the Fed ramped up its fight against inflation. The REIT industry, however, has continued to evolve and it appears that a recovery is likely on the horizon in 2024 and beyond.
Bankruptcies are extremely rare in the REIT sector. After all, REITs are required to keep the bulk of their assets in physical properties, or debt backed by real estate. Most real estate tends to appreciate over time, and as long as it holds its value, a REIT can sell properties to pay down debt in a pinch.
Real estate investment trusts, also known as REITs, typically offer high yields, making them appealing choices for income investors. The real estate stocks that Morningstar covers, as a group, look 12% undervalued as of May 10, 2024.
There are several benefits of adding a REIT to your retirement portfolio. They can provide income, capital appreciation, diversification, inflation protection and could be considered passive investments – meaning you don't need to manage tenants or collect rent from realizing returns on your investment.
Well-managed REITs may contribute to a diversified portfolio and can deliver stable dividends with attractive tax benefits. However, REITs can drop in value and cause investor losses if they are not managed well.
A favorable job market seems encouraging. Robust demand for certain real estate categories, such as that for data centers and need-based asset categories, is likely to keep the momentum going for REITs in 2024.
Will REITs bounce back?
REITs posted total returns north of 5% for the month, although they remain in negative territory year-to-date. On the heels of a rough month of April, the FTSE Nareit All Equity REITs Index mounted a comeback in May with total returns up 5.29%.
"Both public and non-public REIT investments should be considered long-term, and that could mean different things to different folks, but in general, investors who typically invest in REITs look to hold them for a minimum of three years, and some of them could hold them for 10+ years," Jhangiani explained.
Lack of Liquidity: Non-traded REITs are also illiquid, which means there may not be buyers or sellers in the market available when an investor wants to transact. In many cases, non-traded REITs can't be sold for at least 10 years.
Certain market conditions such as rising interest rates, may exist that can hamper the performance of a sector, such as real estate investment trusts (REITs). Eventually, conditions change, and stocks can be purchased at bargain prices.
By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions. Typically, the upfront costs of investing in a REIT are low, while their risk-adjusted returns tend to be high.
