REITs offer benefits of real estate investing without headaches

Financial Planners


For the longest time, says Michael Hansen, real estate investment trusts were the “participation trophy” of the wealth management world: As long as investors were putting money into them, they were going to reap rewards.

Now, though, developments like high inflation and market volatility are forcing planners to be much choosier, said Hansen, the founder and managing partner of Frontier Wealth Strategies in Walnut Creek, California. But that doesn’t mean real estate investment trusts — more commonly known as REITs — have ceased to be good bets. Investors just need to be a tad more discerning.

“I have 22 years in the financial services industry,” Hansen said. “If you go back five or seven years, any person who gathered some assets and invested them in real estate could get some return. Now, with higher interest rates, it’s a bit trickier.”

REITs appeal to many planners and investors because they give them a means of putting money in a diverse portfolio of real estate without having the hassles that come with actually owning apartments, offices or commercial buildings. Many wealth managers see REITs as a safe way to diversify their clients’ portfolios beyond stocks and bonds. 

They’ve also done well over the years. According to research from the National Association of Real Estate Investment Trusts, the average dividend paid by trusts in the FTSE Nareit All Equity REIT Index, which tracks a wide assortment of real estate investment trusts, was 3.66% from January 1991 to July of this year. That compares favorably with the performance of 10-year U.S. Treasury bonds, which had a yield of 2.31% during the same period.

Abby McCarthy, the senior vice president of investment affairs at Nareit, said much of the draw is due to the dividends REITs pay out on income made from rent collections, mortgage payments and similar sources. Even in a year like 2022, when many REIT valuations were down, the trusts continued to provide investors with a steady stream of income.

“A lot of that has to do to their overall structure,” McCarthy said. “They have to pay out 90% of their income in the form of dividends to their investors. So REITs have been a great income-generating investment and, furthermore, they provide a phenomenal total return on investment for people who are using them within retirement portfolios, because you actually get that compound total return of price and income over time.”

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McCarthy cited a survey from the research firm Chatham Partners that found that, out of a sampling of 349 advisors, 83% said they recommend their clients invest in REITs. McCarthy said Nareit’s official position is that investors should consider putting between 5% and 15% of their total portfolios in real estate trusts.

“Many REITs are publicly traded stocks, so they offer liquidity,” McCarthy said. “They are managed by professional management teams. But most importantly, they offer this diversification benefit.”

That doesn’t mean the values undergirding these trusts aren’t subject to fluctuations. From the end of 2021 to June of this year, the average price of REITs traded publicly on stock exchanges fell by about 28%, according to research by the investment banking firm Robert A. Stanger & Company. To be sure, that period also saw large declines in the stock market, which has yet to return to the highs it achieved during the pandemic despite its recent surge.

Kevin Gannon, the chairman and CEO of Stanger, said a closer look at his firm’s research enables a slightly different take on REITs. In the same time that the price of publicly traded REITs declined by nearly 30% on average, the actual value of the underlying real estate that makes up the investment vehicles only fell by 7.5% on average. That means, Gannon said, that there are plenty of investment opportunities for anyone who’s willing to stomach a little volatility.

“The thing about traded REITs right now is that they are a lot better priced than they have been,” he said. “They are more of a bargain today.”

The perception that many REITs are underpriced has begun drawing hedge funds to an investment vehicle previously the preserve of retail investors. To many advisors, the way to get ahead is to be extra choosy about which types of real estate they’re steering investors to.

Hansen said office buildings haven’t entirely rebounded from the high vacancy rates they first took on as a result of the social-distancing policies adopted during the COVID-19 pandemic. According to Nareit, the value of office REITs was down by a whopping 37.6% in 2022, although they showed a month-over-month recovery of 13.3% in July this year. The office sector was the hardest hit in a year that also saw a 31.3% drop for REITs investing in residential properties and a nearly 29% decline for industrial REITs, according to Nareit. 

REITs specializing in data centers have led the recovery this year, rising by 25.6% through June. And despite rising interest rates making home loans less appealing to many people, REITs investing in single-family residences rose by 23.2%.

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Hansen said such volatility is a drawback to investing in publicly traded REITs, which tend to be correlated to other public markets. Last year was also a bad one for the S&P 500, which was down by nearly 20% in 2022.

And this year they haven’t recovered as quickly as surging stock markets. Nareit found that all REITs investing in equity were up by nearly 5% through July, whereas the Dow Jones U.S. Total Stock Market Index was up by 20.4%.

Hansen said the ups and downs shown by public REITs are one reason he tends to direct clients to their privately traded cousins. Rather than being offered on exchanges, private REITs tend to be sold directly to investors, often through financial advisors.

Many have limits on how much money investors can take out at a given time, a feature that tends to make them less subject than public REITs to value fluctuations. The tradeoff, though, is a lack of liquidity. The restrictions private REITs sometimes place on people’s ability to get their money out is one reason many regulators believe they should remain the preserve of sophisticated investors.

According to Stanger’s research, private REITs have risen in value by nearly 60% over the past five years, whereas their publicly traded cousins are up by only about 25%. Still, investors in private REITs have learned over the past 10 months that the limits on their ability to pull back their money are real. The largest private REIT — the Blackstone Real Estate Income Trust — announced in November that it was hitting the brakes on investor redemptions following heavy withdrawals in the previous month. BREIT, as the trust is commonly known, puts up its redemption gates when 2% of the funds held in its real estate investment trust are taken out in a single month or 5% in a given quarter. 

Another prominent non-traded REIT, the Starwood Real Estate Income Trust, followed suit with imposing its own limits on withdrawals shortly afterward. Both funds have continued to apply limits to investors’ redemption requests.

Such illiquidity is why regulators tend to view private REITs with skepticism. A proposed statement of policy being considered by the North American Securities Administrators Association, which represents state regulators, is meant in large part to put non-traded REITs out of reach to investors who can least afford to lose money on risky bets. If adopted in the form first proposed in July 2022, the proposal would urge states to raise the minimum combined income and net worth needed to invest in private REITs to $190,000 from $140,000. The minimum for net worth alone — excluding income from the equation — would go to $340,000 from $250,000.

A spokesman for NASAA confirmed the proposal is still under consideration.

Allan Swaringen, president and CEO of the non-traded REIT JLL Income Property Trust, said withdrawal limits should actually be seen as offering protection against volatility. When some investors choose to take large amounts of money out of a trust at once, those who are left behind can see a massive decline in their investments’ value.

“The share repurchase limits are designed to prevent forced selling of private market real estate,” Swaringen said. “If investors want unlimited liquidity, then that is what the publicly traded REIT market provides.”

Like most REIT advocates, Swaringen maintained investors will do best if they’re prepared to buy and hold.

“Real estate — public or private — should be viewed as a long-term investment,” he said. “And we think many people see the value in having an allocation to both structures within their portfolio.”

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Many advisors agree. Tom Balcom, the founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida, said he views both public and private REITs as good hedges against inflation. He said he can scarcely remember a year when his office rents haven’t gone up, regardless of what was happening with interest rates or the general economy.

He takes that as good a sign as any that real estate will continue to provide income even in the steepest of economic downturns. Balcom said he typically advises his clients to put 10% of their portfolios into REITs.

“In the short term, it might not be the most stable,” he said. “But in the long term, it’s a very solid asset class.”

Angela Dorsey, the founder and financial planner at Dorsey Wealth Management in Torrance, California, said she’s always been attracted to real estate but never really wanted the maintenance and rent-collection responsibilities that would come with actually owning property. She now advises her clients to put between 2% and 8% of their portfolios in REITs, depending on their tolerance for risk and their goals for retirement and other milestones.

Dorsey said she exclusively recommends publicly traded REITs. The trusts she favors are managed by Dimensional Fund Advisors, an investment firm out of Austin, Texas.

“They tend to have lower expense ratios,” Dorsey said. “And lower expense ratios are a key predictor of long-term success with REITs.”

Ed Pierzak, Nareit senior vice president of research, said that even when valuations are down, real estate’s strong income-producing power helps ensure publicly traded REITs will continue paying healthy dividends. 

“And if you take a look at the actual dividend yield that REITs are putting out now, I think that they’re hovering right around 4%,” Pierzak said. “So again, that’s at least akin to, or at times even, a little better than the current 10-year Treasury yield.”

Rather than as an alternative investment reserved for the select few, Pierzak said, advisors should view REITs as being just as essential to clients’ portfolios as stocks and bonds. Many large institutional investors, he noted, hold substantial amounts of money in real estate.

“It’s a massive part of the investment universe,” he said. “It’s larger than the equity and bond markets. And if you’re excluding real estate from your overall allocation, you’re effectively making a bet against it.”



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