What is the outlook for REIT ETF 2023?
REIT and private real estate valuations will continue to reflect higher interest rates and a slower growing economy in 2023. A wide valuation gap exists between REITs and private real estate. This gap will likely close through changes in REIT and private market cap rates in 2023.
While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard. Rising interest rates hurt not only the value of REITs' property holdings but also the cost of debt to finance those properties or even refinance already-owned assets.
The trend started to reverse in late 2023, with the REITs posting a 17.9% return for the fourth quarter. And it will likely continue in 2024 as multiple factors converge to create a favorable environment for the sector, according to REIT fund managers. But as of Dec.
REIT ETFs can be a good option for long-term growth investing because they typically offer higher dividend yields than other types of ETFs and can provide exposure to a diversified portfolio of properties.
Key takeaways
Although the higher cost of borrowing was a headwind, many segments of real estate investment trusts (REITs) continued to show strong fundamentals and supply-demand dynamics. 2024 could be a calmer year if interest rates level off and the pace of commercial real estate transactions normalizes.
The REIT market is projected to see 2.6% year-over-year growth in 2023. The REIT market is forecast to grow at a CAGR of 2.8% from 2022 to 2027.
The generous dividend payments enjoyed by REIT investors may look particularly attractive moving forward. With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
- What dividends and REITs are.
- ARMOUR Residential REIT – 20.7%
- Orchid Island Capital – 17.8%
- AGNC Investment – 14.8%
- Oxford Square Capital – 13.7%
- Ellington Residential Mortgage REIT – 13.2%
- SLR Investment – 11.5%
- PennantPark Floating Rate Capital – 10%
While REIT bankruptcies are rare -- and may not lead to a complete loss of shareholder value, as seen following the 2009 General Growth Properties bankruptcy -- REIT stocks can go to zero.
What are the risks of REIT ETFs?
There are three major risks of investing in REITs: Sensitivity to interest rate changes, vulnerability to real estate trends, and management risk. Like other investments in an income portfolio, REITs are sensitive to changes in interest rates.
An ETF gives you an affordable way to follow the stock market or a particular part of the market. While REITs provide the stability and robust returns of real estate.
Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.
He and Charlie Munger, vice-chairman of Berkshire Hathaway, actively dismissed it for many years. However, Buffett has recently invested in REITs as part of his passive income strategy. Berkshire Hathaway Inc. owned shares of STORE Capital Corp.
In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023. Based on historical experience, the convergence of the wide valuation gap between public and private real estate will likely ensure continued REIT outperformance into 2024.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
Total return of the 50 largest REITs in the U.S. 2023
Among the 50 real estate investment trusts (REITs) with the largest market cap, Prologis (PLD) and American Tower (AMT) recorded to the at the top of the list with around 93 and 83 billion US dollars each.
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.
The REIT sector had a rough start to 2024 with a -5.72% total return in January. Large cap REITs (-4.79%) outperformed their smaller peers in January. Micro cap REITs (-8.39%) averaged the steepest declines. Only 9.55% of REIT securities had a positive total return in January.
After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.
Is it better to buy property or REITs?
Key Takeaways. REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.
In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock. “REITs are better for short-term cash flow and income versus long-term upside,” says Stivers.
"REIT share prices were hurt by macro issues such as hybrid work model-driven office space demand, slower IT & ITES hiring, expected global recession and high interest rates," said Shantanu Bhargava, head of discretionary investment services at Waterfield Advisors.
Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 8%.
