I was wondering how the current Macro economic conditions will affect the price of REITs. I’m thinking of investing in VNQ (Vanguard Real Estate ETF) which contains a mixture of REIT sectors. Since this is such a broad fund I think it’s appropriate to ask about the Macro economic impacts.
The current high interest rate environment depresses the price of REITs because bonds compete with the REITs for income-seeking investors and also high interest rates make it more difficult for REITs to borrow money for operations. The economy is also slowing and is predicted to enter recession. This will probably be a third factor depressing REIT prices due to lower demand although different sectors have different sensitivities to economic conditions.
What is your opinion on the optimum time to buy a REIT ETF, if any?
I don’t like REIT ETF because within REIT’s there are many sub-sectors and they are impacted differently by the economic, interest rate situations. Just a couple of example: e-commerce may continue to grow hence warehouse may do well, US structurally has housing shortage and especially multi-family, rental properties, they may do very well, because apartment rent may continue to keep up with inflation.
Just looking at interest rate alone or general economic weakness is not the right way to look at it.
One of the areas you may want to look is REIT preferred’ s. REIT’s issue lots of preferred’ s. They don’t have the voting power of equity, nor have the protection/ call on the assets like bonds. Often when REIT’s are acquired or merged, they get stranded, recent example is PSB preferred’ s. In many ways buying them means you are settling for an yield where often you are not compensated enough for the risks.
So with that disclosure, there are some selective preferred’ s one may want to look into. For ex: SHO, this is a hotel REIT preferred. Unlike other REIT’s hotels are even more sensitive to economic downturn and their lease term is 1 day. SHO, I don’t own it, is one of the hotel REIT’s whose management I like. They moved to low base dividend and year-end true-up many years ago and this served them and investor well. Why am I talking about common dividend policy, when I am suggesting preferred? Just to highlight how conservative the management is. All my preferred’ s were redeemed and generally made money, but that was past.
Now, I am looking at buying some, expecting the interest rates will actually go down and the preferred might trade at par some time in the future. Of course sometime in the future could be anywhere between 6 months to 2 years to who knows.
Because of the all the concerns listed, I will limit this to a small quantity. I have overall 10% exposure to fixed income and is made of 10 different issues, across the industries and instrument type and having an yield of 7.5%.
You are spot-on about REIT preferreds–they can be quite rewarding at times like these. I made a lot of money investing in selective REIT preferreds during the great recession/great financial crisis of 2008-2009. I was able to buy shares in those REIT preferreds at huge discounts to their par (call) value, and then sold them when they reached par value, or close to par value.
But, REIT preferreds are typically illiquid and thinly traded and should only be bought and sold with limit orders to avoid surprise and sudden spikes in their share prices. And I would only buy REIT preferreds in those REITs that are high quality.
That said, I am not recommending anything, and anyone reading this post should do their own due diligence and research.
I currently own no REIT preferreds.
I second that VNQ is not a good choice. In REIT world, because some sectors are in a secular funk, and you can outperform by avoiding them. Like office space, for example.
Others, like cell phone towers, are in growth, particularly in developing countries. AMT is a personal favorite in this area.
Perhaps others could mention their favorite sectors.