Many contrarian investors are certainly interested in buying the dip in REITs given the low valuations, generous yields, and upside in the event of a Fed pivot. Further, many components of the real estate market remain healthy such as healthcare and industrials. However, there are some risks that investors need to consider.

There are secular problems in areas like retail and office buildings due to oversupply, while there have also been significant changes in people’s behavior, affecting demand. Additionally, investors should be aware that every bear market results in a handful of value and yield traps which become plagued by balance sheet and liquidity issues especially in high-rate environments.

Value traps are situations in which stocks look attractive by conventional metrics, however these low valuations are a reflection that the market isn’t optimistic about the company’s prospects. Similarly, ‘yield traps’ are when yields look attractive, but the market is expecting a dividend cut as current payout ratios are not sustainable. 

For investors interested in REITs, they must prioritize quality and strong financials. This is especially true in the current situation where the path and trajectory of monetary policy remains highly uncertain. If rates do stay elevated for a long period of time, some REITs will go bankrupt, while many will have to pay their dividends in order to remain solvent. 

Finsum: REITs are attracting interest from contrarian investors, but here are some downside risks to consider.