In this global crisis, does it make sense to invest in REITs? As the markets continue to seesaw through this economic shutdown, REITs have been one of the worst performing assets. Some of the largest players fell as much as 80 - 90% in March and April! Where are they headed next...
Today we're going to talk about — does it make sense to invest in REITs (Real Estate Investment Trusts) during this global economic crisis? In these troubling times, do they offer the diversification and performance that many claim?
The short answer — NO.
As the markets continue to seesaw through this economic shutdown, REITs have been one of the worst performing assets. Some of the largest players fell as much as 80 - 90% over the last month!
Many of these companies took on too much debt and are now getting squeezed as rental incomes vanish and redemptions increase. To the point where some are already beginning to liquidate assets.
With increasing (and unprecedented) levels of unemployment, many tenants cannot and will not pay their rent right now. And it seems that won't be changing for the foreseeable future.
The initial idea behind REITs was to give everyday investors an easy way to gain exposure to real estate. You could buy in with small amounts of capital and get the diversification, dividend cash flow, and liquidity of a publicly traded asset.
In practice, the model doesn't seem to hold up in severe market downturns.
Moreover, even in healthy market conditions REITs proved to be too highly correlated with equity markets, therefore didn't actually provide the proclaimed diversification that investors needed. e.g. REITs had been mirroring movements with indices such as the S&P.
While we'd always thought, "Oh, REITs are great because they add diversification to my portfolio," we found out that they really don't. In reality, they're just another corporation, they don't really own the land, and they're actually just debt instruments arbitraging a thin margin between their loans and rental income. When there's a shock to the rental market — the model combusts.
However, real estate itself remains a vital asset during these times, and think there will be a shift away from excessively leveraged public investments and back toward models of direct ownership.
Remote Ventures is an international real estate investment company building software to help you scout foreign markets, find up-and-coming neighborhoods, identify and analyze properties, close deals, and turn them into cash-flowing investments.
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