When real-estate investment was hot, it was in to snatch up the largest properties or fix-up those with the most potential. Real-estate investing is still very active, only now the focus is on shares of professionally managed property portfolios.
Investors are returning to a once lucrative REITs.
So far this year, real-estate investment trusts (REITs) have taken in over $4 billion. REITs mostly buy commercial properties like apartments, malls, and office parks. This represents an increase of almost 20% from 2010, and 400% from 2009. This is a blistering pace that hasn’t been seen since before the financial crisis.
The numbers are impressive, but not entirely unexpected. It seems that when everything else is on the decline, investors will find what works. Advisors caution about REITs, however. Amid the European debt crisis that hit over the summer, REITs suffered along with the rest of the U.S. market.
So long as one proceeds with caution, many advisers can point to benefits of REITs. For example, some commercial real-estate hasn’t gone through the same extended slump as the residential market. In particular, REITs with an emphasis on apartments are doing great. This is largely due to tighter lending standards that have forced renters to put off the house for now, and those who have had their homes foreclosed on now must rent as well.
The low-interest rate environment in which we find ourselves has also bolstered REITs, since most of these investments employ leverage to some extent. However, since rents are inclined to increase with inflation, REITs can be used as an inflation hedge. Rents then are passed on to shareholders, because by law, REITs must pay a minimum of ninety percent of their taxable income to these shareholders. These dividends, then, offset some of the risk.