Will REITs do well in 2024?
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year. Publicly-traded REITs had a rough go of things during the Fed's regime of rising interest rates.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year. Publicly-traded REITs had a rough go of things during the Fed's regime of rising interest rates.
Home price growth will vary from market to market
Against this backdrop, nationwide sales are expected to see only a modest uptick in 2024 over 2023's long-term low. Real estate activity will vary significantly from market to market with some top-growth areas expected to see double-digit increases, according to Hale.
The generous dividend payments enjoyed by REIT investors may look particularly attractive moving forward. With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts.
REIT Analyst Price Target
Based on 27 Wall Street analysts offering 12 month price targets to REIT holdings in the last 3 months. The average price target is $27.45 with a high forecast of $31.29 and a low forecast of $24.05. The average price target represents a 8.12% change from the last price of $25.39.
As we dive into 2024, the Fed's accommodative approach to tackling inflation is likely to provide an impetus to the REIT sector, which depends highly on the debt market to carry out business activities. These companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations.
While real estate has never been a big part of Buffett's investing strategy, Berkshire Hathaway has owned shares of STORE Capital, a REIT focused on single-tenant operational real estate.
The median home price will remain elevated in 2024. However, experts have predicted that prices will increase at a slower rate. 2024 Will Be Competitive: Even while 2024 is building up to be a seller's market, it will remain fiercely competitive. The market might be a little crowded.
If the news of a potential recession worries you, it's likely best to wait, particularly if your main income source is susceptible to an economic downturn. Just like you can't time success in the stock market, trying to time the real estate market is just as futile.
Redfin says they expect new listings and home sales to rise in 2024 and it also expects prices to fall significantly in parts of coastal Florida such as Cape Coral, because the risk of natural disasters is driving up the cost of home insurance.
Why not to invest in REITs today?
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
But from a REIT-wide perspective, one of the biggest problems has been rising interest rates. Rising interest rates impact REITs in a number of ways. Directly, interest expenses can go up as the interest rates on variable-coupon debt increase and as fixed-rate debt rolls over.
This is the biggest and most important mistake that REIT investors keep on making. They see REITs as "income vehicles" and therefore, they will select their investments based on their dividend yield. In their mind, the higher the better. But in reality, the dividend is just a capital allocation decision.
According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower risk bonds.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
The FTSE Nareit All Equity index, consisting of REITs that exclude mortgages, generated a 15.9% annualized return during recessions and 22.7% in the year following the end of a downturn, according to the National Association of Real Estate Investment Trusts.
1. Federal Realty: The king. Federal Realty has increased its dividend annually for 54 consecutive years, which it claims (and there's no reason to doubt it) is the longest streak of any publicly traded real estate investment trust (REIT).
There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to.
Poor Rates Of Compounding: Another big reason why REITs generally have low appeal to Buffett and Munger is because real estate generates poor returns on invested capital.
Which REITs pay the highest dividend?
REIT | Forward dividend yield |
---|---|
Blackstone Mortgage Trust Inc. (BXMT) | 12.1% |
KKR Real Estate Finance Trust Inc. (KREF) | 13.5% |
Easterly Government Properties Inc. (DEA) | 8.3% |
Realty Income Corp. (O) | 5.5% |
According to the data, REITs have outperformed stocks over the long term, delivering an 11.9% average annual return from 1972 to 2021 (compared to 10.7% for the S&P 500). At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years.
Real estate experts predict a continued housing shortage, and because they expect high buyer demand to keep pushing home prices up, 2024 may be an ideal time to sell. Experts also anticipate a leveling out of 2023's elevated mortgage rates, expecting rates to eventually settle around 6% – 7% in the spring.
"Some traders predict a flat or down market in the first half of 2024 due to high inflation, recession fears and rate hikes from the Fed. However, others foresee a bull market continuing, citing potential Fed rate cuts, earnings growth and historical trends around election years."
Nevertheless, she eventually expects markets and the economy to bounce upward in 2024, a sentiment shared by Jay Hatfield, CEO of investment firm Infrastructure Capital Advisors. Recent economic data “validates our theory that 2024 will be the year of rate cuts, and that's very bullish for stocks,” he says.
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