Real estate investment trusts (REITs) offer an opportunity to invest in properties used by farms, retail, communications, health care, and more.
REITs are holding companies that own income-producing properties such as apartments or malls
Long before the stock markets existed, investors had a fixation on land. After all, as the old saying goes, they’re not making any more of it. There’s also a limit to what you can put on land (houses, skyscrapers, shopping malls) and get out of it (grain, gold, oil, wood).
Real estate investment trusts, or REITs, first emerged in the 1960s, but for a long time they tended to fly under the financial media and investing radar. More recently, many market professionals have turned to REIT investing as an inroad to fast-growing areas of the economy.
What is a REIT, and how does REIT investing work? At its most basic, a REIT is a holding company that owns income-producing properties such as apartment buildings or commercial strip malls. REITs often, although not always, trade on major exchanges.
Today, REITs own about $3 trillion worth of U.S. real estate assets. More than two-thirds of that total is held in publicly listed and non-listed REITs, according to Nareit, a research and lobbying group based in Washington, D.C. (Privately held REITs make up the remainder.)
Here are some basics of how to invest in REITs. We’ll look at a few REIT sectors linked to specific industries such as health care, retail, agriculture, and infrastructure.
REITs are a different asset class from equities and often have relatively low correlation to stocks, proponents say, meaning REITs can offer diversification for investors. Additionally, REITs typically pay out most or all of their taxable income each year to their shareholders as dividends; the IRS requires them to pay out at least 90% annually.
Historically, REITs don’t always move in tandem with the broader stock market, which in part reflects the time difference between the business cycle and the real estate cycle, which historically lasts years longer.
In general, the REIT market can see periods of outperformance versus the broader stock market. However, the sector can also see periods of intense volatility. Figure 1 shows a 20-year chart of the Dow Jones Composite All REIT Index ($RCI) versus the S&P 500 Index (SPX). Note that in the early 2000s (a period which many called a real estate bubble) $RCI outperformed the SPX, but the sector was hit particularly hard during the ensuing financial crisis in 2008-09.
The U.S. Federal Reserve’s rate hike cycle, which began in 2015, might appear bearish for REITs, as rising rates can mean higher borrowing costs for homeowners, builders, and others in real estate. Rising interest rates and expectations of tighter monetary policy have at times pressured REIT prices.
Still, borrowing costs remain relatively low, and in 2019 the Fed signaled that it was done raising benchmark rates for now. Plus, rising rates are often driven by economic growth, which may support REIT earnings and dividends in the future, according to Nareit.
Retail REITs own and manage real estate devoted to shopping malls, strip malls, big-box stores, and the like. They rent space in those properties to tenants. For the 12-month period through the week ending April 18, an index of 33 U.S.-based retail REITs, including shopping-centers, regional malls and “free-standing” retail properties, posted a total return of 18.8%, according to Nareit (free-standing properties have a single business, such as a restaurant or pharmacy).
Over longer periods, retail REITs weren’t as robust, with the Nareit index posting a three-year total annual return of -2.4%, a five-year return of 3.9% and a 10-year return of 14.2%.
Still, considering the recent struggles of traditional retailers, investors should proceed with caution, analysts say.
The growth of e-commerce “has created upheaval in the retail real estate market, which is saddled with tired big-box concepts and a need to rethink brick-and-mortar location strategies,” Green Street Advisors, a REIT researcher, said in a 2019 outlook. Many key strip center tenants “are struggling in the current retail environment. Above-normal retailer bankruptcies and store closures should be expected for the foreseeable future.”
Retail REITs own and manage shopping malls, big-box stores, and free-standing retail properties.
Growth in both the U.S. senior population and demand for medical services signals continued strength in health care REITs, some market professionals say.
Similar to their retail counterparts, health care REITs own and manage a variety of properties and collect rent from tenants. These properties include senior living facilities, hospitals, medical office buildings, and skilled nursing facilities. Over the past 12 months (through the week ending April 18), U.S. health care REITs posted a total return of 30%, according to Nareit.
Health care REITs posted a three-year total return of 4.9%, a five-year return of 5.8% and a 10-year return of 13%.
Health care REITs own nursing facilities, hospitals, medical offices, and more.
There are only about two REITs devoted to U.S. farmland, according to Nareit (the group includes farmland in a category of about a dozen “specialty” REITs that own and manage a “unique mix” of properties, including movie theaters and casinos).
Farmland REITs own land used to raise crops like corn and wheat. Although everyone has to eat, land values do fluctuate.
Data center, industrial, and infrastructure categories are among the top-performing REIT sectors in recent years, reflecting growth in e-commerce, according to Nareit.
Infrastructure REITs, which include cell towers used to relay e-commerce orders, posted a total return of almost 29% in the 12 months through April 18, according to Nareit data. The three- and five-year total returns were 21% and 18%, respectively (10-year return was not available).
Industrial REITs, which include warehouse distribution and logistics facilities for e-commerce goods, returned nearly 20% over the same 12-month period. The three-, five- and 10-year total returns were 20%, 16% and 19%, respectively.
Data-center REITs returned about 14% both over the past year and the past three years (five- and 10-year returns were not available).
Data center, industrial, and infrastructure categories form a synergistic “triad” for the e-commerce economy, said Ron Kuykendall, vice president of media and public relations for Nareit.
“E-commerce is a major driver now,” Kuykendall explained. Over the past 10 years or so, as e-commerce grew, industrial REITs “morphed into the warehouse logistics backbone for the e-commerce industry and for e-commerce players of all types.”
“Companies such as Amazon (AMZN) and others involved in the e-commerce supply chain, such as FedEx (FDX), need facilities to move and warehouse products close to the markets where they’re delivering,” he added.
Data center, industrial, and infrastructure REITs benefit from e-commerce growth.
Ready to explore the world of REIT investing? Do your research first; know the related industry fundamentals, your goals, and your risk tolerance. TD Ameritrade clients can screen the universe of REITs using a robust set of criteria before making a potential land grab (see figure 1).
FIGURE 1: WHITTLE IT DOWN. As of April 2019, a sector search on tdameritrade.com pulls up 412 REITs. How to choose which REITs to consider? TD Ameritrade clients can log in and, under the Research & Ideas tab, select Screeners > Stocks > Create a Screen. Next, select Sector, Industry & Sub-Industry > Real Estate. From there, you can focus your search using additional criteria such as fundamentals, valuation, dividend history, and more. For illustrative purposes only.
Use a stock screener to narrow selections based on sectors.
Log in to your account at tdameritrade.com > Research & Ideas > Screeners > Stocks.
Bruce Blythe is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade does not provide tax advice. We suggest that you seek the advice of a qualified tax-planning professional with regard to your personal circumstances.
Asset allocation and diversification do not eliminate the risk of experiencing investment losses.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.