It wasn’t just meme stonks and IPOs exploding last year. 💥 Flying below the radar was a scorching performance by Real Estate Investment Trusts, aka REITS. REITs are a vehicle for investing in property without the hassles that come with being a landlord, and they have special rules for how they operate. In the US, REITs must pass on 90% of their profits in the form of dividends, so they suit investors hoping to generate income. But as US real estate prices took off last year, REITs also saw big capital gains with total returns of more than 40%, even outperforming the S&P 500 index. Did inflation help? Historically REITs have been one of the top asset classes in times of inflation. That’s because overtime, rents can usually rise to help offset inflation.
REITs love property probably even more than Kiwi politicians. They range from trusts, like Digital Realty Trust (DLR), which specialises in investing in data centres, to American Tower (AMT), which invests in the land that hosts communications towers, and everything in between. 🗼The world’s largest REIT is ProLogis (PLD), providers of warehouses for companies that need shedloads of floor space, like Amazon, Walmart and DHL. It has a market capitalisation of US$120 billion, about the same size as PayPal (PYPL).
So are REITs ‘safe as houses’? Not necessarily. Rising interest rates can be a challenge for real estate and shares alike. And recently the US Federal Reserve raised warning flags around residential real estate prices, dropping the words 'US housing’ and ‘bubble' in the same sentence. 🚩🚩 🚩 The last time those words were heard together during 2007 to 2009, the Vanguard's REIT fund (VNQ) plunged almost 65%, from a high of US$65 to a low of US$23, before steadily bouncing back.