The vast majority of REITs (Real Estate Investment Trusts) fell in value last year due to the pandemic, especially those that focus on retail, office and hotel property. While they have generally been rebounding in 2021, REITs have still underperformed the wider stock market over the last 12 months. Within the different REIT sectors, retail, office and hotel REITs were still down by 5% at the end of Q1 2021, compared to the start of the pandemic a year earlier, while residential, industrial and self-storage REITs were up by 15% during the same period.
Before we look at why the REIT sector could be worth investing in, it is worth remembering that REITs tend to pay attractive dividends because, in exchange for special tax treatment they must distribute at least 90% of their taxable income each year as dividends to shareholders. There are also more than 50 REITs listed on the London Stock Exchange with a market capitalisation of over £50bn.
Regular readers of PIN will be aware of our fictional property-related PIN Funds - one is focused on the UK and the other is focused within the Eurozone. The UK Fund includes several REITs like Unite (student housing) and the two self-storage REITs (Safestore and Big Yellow). Likewise, the EU PIN Fund includes an Irish Residential REIT (IRES), a Dutch shopping centre REIT (Wereldhave) and a Belgian healthcare REIT (Cofinimmo). The average return for the latter three was almost 24% in the first 12 months of the Fund’s creation (to July 2021).
Globally, the best performing REITs in Q1 2021 were in Japan, Hong Kong, the US, and Canada, but in Europe they continued to fall in value. The big investors soon pounced however, and according to data released in July by CBRE, investment in European real estate increased by 45% in Q2 to reach €70bn.
If inflation is coming, REITs can offer some wealth protection
Historically, when there have been previous waves of globally rising interest rates, REITs have continued to perform well. While UK consumer price inflation did slow slightly in July, falling back to 2%, it hit 3% in the Eurozone in August, which is a decade high, and property prices have been rising rapidly in most developed countries over the past 12 months. Most importantly though, the price of oil recently passed $70/barrel and many analysts in the sector expect the price of oil to reach $80/barrel before the end of this year. However, the Bank of England is still saying that it will keep the base rate low for the foreseeable future, even if UK inflation catches up with the rest of Europe and hits 3%. This suggests that the prospects for REITs look good, as inflationary pressures will likely see rent rises when it is time for a lease renewal, eventually leading to higher capital values.