As we ended 2018, I noticed a quite compelling place that REITs serve in a well-balanced diversified portfolio. While Real Estate Investment Trusts (commonly referred to as REITs) tend to get attention due to their yields, investors would be wise to recognize REITs’ valuable and defensive nature.
REITs have a quite the long history helping investors defend against inflation, as property values tend to rise with the overall price environment, plus the potential for growing cash flows as landlords raise rents. Indeed, the perception that REITs underperform when interest rates are rising, just isn’t supported by historical data. As well, increased construction costs can deter new property supply, easing competitive pressures. The net effect? REIT dividends have grown faster than inflation. Here in the U.S., for example, REITs have increased dividends at nearly double the rate of inflation over the past 25 years.
A research paper from Cohen & Steers explained, “After one of the slowest expansions in history, the global economy is heating up, and long-dormant inflation pressures are beginning to build. This cyclical shift—combined with unusual late-cycle tax cuts, rising protectionism, and the unprecedented unwinding of quantitative easing—is thrusting investors into uncharted territory.”
Specifically, the global fund manager believes investors “can benefit from small but important changes to asset allocations, moving a portion of core stock and bond investments into reflation-oriented asset classes that have the potential to enhance real returns.”
As Cohen & Steers suggests, “Despite healthy real estate fundamentals and rising dividend payments, global REITs have widely trailed global equities in recent years, hindered by concerns that rising interest rates could increase financing costs and reduce the relative appeal of REIT income.” This means that earnings multiples have contracted, and global REITs are trading at an overall discount to their underlying property values.