REITs Help Relieve Inflation FearsSheaff Briefs Editor
According to Nareit.com (the worldwide membership organization for real estate companies), REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years. What’s more, Nareit authors add, while real estate investment trusts have not proven to be the only inflation hedge, “their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.”
To be sure, inflation is an important topic of the day. “New Inflation Fears Rattle Wall Street, Retirement Planners,” Lynnley Browning writes in Financial Planning. “Inflation has emerged as the new spoiler for retirement.”
Real Estate Investment Trusts, or REITS, are an excellent hedge against inflation, posits Sheaff Brock Senior Portfolio Manager JR Humphreys. Reasons for that include:
- Many leases are tied to inflation.
- Higher costs for land, materials, and labor reduce the potential profits of new real estate development.
- Existing properties have low exposure to labor and commodity costs.
- Property taxes (existing real estate’s biggest expense) tend to rise more slowly than other costs.
REITs are benefitting from an increase in three categories of demographic need, Humphreys adds:
- Aging baby boomers are driving the need for healthcare and skilled nursing facilities.
- Increasing e-commerce is driving the need for warehousing facilities.
- Work-from-home trends drive the need for data server farms and 5G cell towers.
REITS offer investors 3 benefits lacking in bonds:
1. higher income
2. growing income
3. potential for capital appreciation
“Unlike bonds, which pay a fixed amount of interest and have a set maturity date, REITs are productive assets that can increase in value indefinitely. As these businesses profitably acquire more properties, they grow their cash flow, can increase their dividends, and see their stock prices appreciate over time,” Simply Safe Dividends explains, offering this chart comparing bonds and REITs:
REITs offer the possibility of significant diversification. In fact, there are more than 225 publicly traded REITs in the United States. Types of property in REITs include:
- apartment buildings
- medical facilities
- data centers
- shopping malls
- cell towers
- data centers
As JR Humphreys sums up the situation, Real Estate Investment Trusts offer both conservative and aggressive investors the potential for income and capital appreciation, in addition to providing portfolio diversification through the addition of real estate.