Are REITs Particularly Well-Positioned for the Next Recessions?
Today, on Redhead Mom, I’m sharing a partnered guest post about REITs.
Real Estate Investment Trusts, REITs have proved to be secure despite an economic downside. However, the industry has, without doubt been affected by the current pandemic. In the first 2020 quarter, REITs earnings in the US declined by 9% as likened to the previous period. Most sectors in REIT aren’t showing a similar defensiveness this time despite having a different recession as compared to the past. Some REIT industries have demonstrated more resilience than others. Some sectors have actually proved a more sustained improvement, thus attracting investors searching for yields. Let’s keep reading to find out the REITs position in the future recession.
Why REIT’s a Better Way to Go For a Recession
Sincerely, no recession is similar to another. A good example is when there was a tremendous financial crisis, and banks stopped functioning. Consequently, more other sectors, including REITs, were affected. But afterward, banking regulations were formatted and expanded to avoid such a repeat in the future. Another crisis happened in 2008-2009 that gave many nightmares to investors who today think of avoiding REITs. However, we should recognize the fact that recessions are different. That’s why we should consider other asset classes’ performance over various past cycles to ascertain their pliability to a downturn.
More other businesses will possibly feel the hit of a recession before it affects most REITs sectors. A good example is a textile industry that could reduce service, cutting its order book to half from one to the following. On the other hand, it is usually described as a conservative property. It’s a mere combination of some piece of the planet called land and structured made and developed by man. That’s why it’s a tangible asset with value to its occupants. Its value can be termed as relevant, flexible, and limited, making it stable and durable.
Real estate is described to be relevant because the shelter is a basic need, and everybody needs somewhere to live. Furthermore, people need a place to grow food, factories for goods production, and warehouses for storing goods for sale or consumption and use. In other words, real estate is more important for human survival and prosperity, which is hard to replace. Flexibility is seen through how one building can serve various functions even without making changes to it.
Sometimes small changes or renovations may be required but be sure it’ll come with some profit later. It’s the reason why a building currently having an unprofitable business isn’t a waste because its flexibility gives it value. About real estate is limited, it only implies the land size on earth isn’t infinite. It has only specific zones suitable for human settlement and farming- for instance, the Sahara desert doesn’t support farming.
The three qualities are the main reasons real estate can’t easily be worthless. The only misfortunes can arise from mismanagement and overleveraging.
REITs are mainly affected due to numerous portfolios with dozens or hundreds of professionally managed investments having limited leverage. This helps become resilient to a recession. On the contrary, stocks come and go like Amazon replaced Sears, Nokia with Apple, among other examples.
Reasons why REITs are safer in the next recession
With all the below benefits put together, REITs are indeed well-positioned in the next economic downside. They include;
- More resilient banking: REITs’ shock experienced during the 2008-2009 crisis wasn’t majorly due to operational challenges concerning investments, but due to the banking sector’s downfall. As a result, REITs faced refinancing issues and troubles leading to dividends cut down by REITs for capital raising at its worst moment. That risk has since been mitigated with actions for assuring better resilience by the banking sector during economic hits. Currently, the banking industry is much more stable, meaning the REITs are on a safer side too.
- Lower leverage: The last recession taught REITs a lesson and have since maintained the most robust balance sheets like never before. Their debts to assets have been deleveraged to 35% averagely, which is conservative. On the other hand, private investors use up to about 70% of debt to finance transactions.
- More robust fundamentals: The REITs real estate fundamentals are wonderful, having a 2-3% growth throughout its property segments. A report by NAREIT states that REITs’ current performance is at the climax. Again, not only is overbuilding not there, but also growth is on the go.
- Reasonable valuations: As earlier said, REITs’ balance sheet is at its most vital position. The 10-year Treasury yield spread is high historically. This means that REITs prices are lower as compared to S&P500, that’s at a 30% premium. It merely suggests that other businesses are likely to fall in the coming recession putting in mind that their cash flows are different from REITs’, and they’re again more dependent on growth. Also, they’ve got more valuations aggressiveness.
- REITs have a bright Macro background: A lot is happening in the business industry. For instance, slowing economic growth, piquing interest rates, and trade wars are pressurizing worldwide companies. But, are REITs any better than these? Yes, because they’re consistent in the high-income generation, which has value in a low-interest rate globe. Furthermore, you can’t find them in a trade war because they’re not indulged in foreign income and are also not so reliant on growth for attractive returns production. Reach out to Bugis Credit for more information regarding REITs.
The Bottom Line
Several markets have led to new living plans, not forgetting the impact on consumer behavior, which have developed new industries and business trends. This same transformation has occurred on REITs, more so their property growth. It’s the reason investors need to evaluate the way these trends affect the entire REITs sector and make rational decisions.
You may not believe it but be strongly convinced that this high income generating portfolio has a greater resilience in cash flow earning potential than other businesses. It may not be clear about how the REITs’ prices will be in the next six months from today. However, they’re probably going to lower in the next economic downturn. The hit is likely to be well mitigated, thus won’t last long.