Economy

In SeekingAlpha, Jussi Akola discusses the opportunity in REITs and identifies some that are yielding more than 8%. REIT stocks are down significantly over the past 18 months due to higher rates and increasing pessimism around real estate prices. Yet, prices have remained resilient despite these headwinds. Additionally, many REITs continue to increase their dividends and are quite attractive on a valuation basis.

And, there are some indications that the macro environment is improving. For one, recent economic data in terms of mortgage applications and housing stars has shown an uptick. Longer-term trends in terms of inflation and the economy also support the notion that the Fed is close to the end of its tightening cycle which should be a boost to the sector as well.

Akola likes Global Medical REIT which is a REIT that invests in medical offices in secondary markets and has an 8% dividend yield. By investing in less competitive markets, it has higher cap rates with less competition from new projects. Additionally, longer-term trends around medical spending are also supportive given the aging population and long-term trend of healthcare inflation outpacing inflation.


Finsum: REITs have significantly underperformed over the past 18 months. Yet, some investors see value in the asset class due to an improving macro environment.

 

In an article for MarketWatch, Brett Arends discusses the tradeoffs of traditional real estate investing vs REITs. While many people have built wealth by buying and renting homes, Arends believes that investing in REITs is a better option for most investors given costs and complications.

Additionally, the upside of real estate ownership is less appealing in an environment of higher borrowing costs. Many real estate investors are making the mistake of looking at returns over the past 30 years and projecting them forward. However, the last 30 years saw interest rates decline by a significant margin which is unlikely to be true over the next 30 years. 

REITs offer exposure to real estate as well and have outperformed home prices by about 3% annually. Currently, home prices remain elevated, while REITs are down 40% over the past year in many cases, leading to attractive yields and compelling value. 

Further, REITs are much more liquid and can be bought and sold instantly through any brokerage. In contrast, real estate transactions have massive costs and take time. Additionally, REITs are inherently more diversified than a real estate investment which means less risk. 


Finsum: Brett Arends discusses why the risk-reward equation currently favors REITs over traditional real estate investing given costs, value, and complexity.

 

In an article for SeekingAlpha, Armada ETF Advisors make the case for why public real estate is due to outperform vs private real estate given the gap in valuations. Over the last couple of years, the combination of the Fed’s rate hiking campaign and weakness in segments of the real estate market like commercial real estate have led to major drawdowns for publicly traded REITs. 

In contrast, private real estate has fared much better. According to Armada, these types of wide differentials in performance have been reliable indicators of mean reversion, historically. In addition to favorable valuations, the firm also believes that the headwind of higher rates is about to recede given trends in inflation and budding signs that a recession is imminent.

Over the last 2 decades, there have been 8 instances when REITs underperformed by more than 10%. Each instance was followed by a period of strong REIT performance in absolute and relative terms. 

It’s also a rare opportunity for investors to acquire high-quality real estate assets at cheaper prices than what is available in private markets. Typically, the situation is inverted given the greater liquidity of publicly traded REITs. 


Finsum: Private real estate has outperformed public real estate by a significant amount over the past year. But, it could be an indication that a major mean reversion is imminent. 

 

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