This is your once in a lifetime chance to win big

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Over the past few months, we have seen a market sell-off that has pushed most sectors of the market lower.

The S&P500 (SPY) is down 23%, REITs (VNQ) are down 24% and the NASDAQ (QQQ) is down more than 30% since the start of the year.

In this environment, it is better to take a step back to know where to invest.

Although tech stocks have fallen the most, they have seen massive gains over the past few years. As a result, they are still not trading at particularly cheap valuations. They are also the most affected by the current high inflation and rising rates, as these are growth stories with the lion’s share of their cash flow expected in the distant future.

Likewise, the S&P500 is still valued at a historically rich valuation and this is largely due to tech stocks, which make up a significant portion of it:

Chart
Data by YCharts

In the meantime, REITs are in the opposite boat. The price of their shares has been stable for 6 years, despite solid fundamentals and a significant appreciation of the real estate market since:

Chart
Data by YCharts

REITs performed so poorly because the market favored growth investments and then came the pandemic, which continues to negatively affect their market sentiment to this day.

While REITs, like everything else, have grown since March 2020, they are still 10% below pre-pandemic levels:

Chart
Data by YCharts

That’s the performance of a market-cap-weighted ETF, so you can imagine that many of the smaller, lesser-known REITs are down much more than that. Some individual REITs have fallen 30%, 40%, 50%, or even more.

This is despite the fact that most REITs:

  • generate record cash flow;
  • pay dividends higher than ever;
  • have the strongest balance sheets in their history;
  • take advantage of strong growth prospects as rents rise with inflation;
  • and own assets which have seen enormous appreciation in recent years.

The market still treats REITs as if they were much less valuable than before the pandemic when in reality it is the exact opposite. Therefore, we have here an obvious “bad rating” situation that is ready to be exploited.

In this article, I will argue that we are now witnessing a “once in a decade” opportunity to achieve big returns in REITs. With modest valuations and strong future prospects, REITs are poised to rise in the years to come. Here are some key reasons why.

Real estate will always be needed

Real estate is a vital need. People will always need places to live, play, work, store things and do business. As long as this remains a fact – and it always will be – REITs will have a huge market to serve.

There are countless things that people will always need, no matter how much human society changes. Many of these things are provided by REITs. For instance:

People will always need a place to live, like an apartment offered by Essex Property Trust, Inc. (ESS):

apartment community

Apartment Community (Essex Property Trust)

People will always need health care – provided in a hospital like those belonging to Medical Properties Trust, Inc. (MPW).

Hospital

Hospital (Medical Properties Trust)

Retirees will always need living space in old age – usually in retirement communities like those owned by WellTower Inc. (GOOD).

senior residence

Housing for the elderly (Welltower)

People will always need haircuts – at hair salons in strip centers like those owned by Federal Real Estate Investment Trust (FRT).

Mall

Mall (Federal Realty Trust)

People will always need industrial warehouses to store and ship the goods they order from Amazon.com, Inc. (AMZN) or elsewhere:

Warehouse

Warehouse (Prologis)

People will always need agricultural land to feed themselves:

farmland

Farmland (Gladstone Land)

I could go on and on, but you see where I’m coming from.

REITs possess properties that meet universal human needs. As businesses come and go, the need for high quality real estate will never go away. This means that REITs have secular growth potential and will never become “irrelevant”.

These items cannot be inflated, and over the long term the value of these assets is almost certain to increase as long as they are well managed and prudently funded.

In fact, REITs tend to generate the highest returns when inflation is high and interest rates are rising. This makes sense, because the positive impact of inflation on rents and property values ​​is far greater than the negative impact of rising interest rates:

REITs outperform inflation is high

REITs outperform inflation is high (NAREIT)

REITs outperform in times of rising interest rates

REITs outperform in times of rising interest rates (Cohen & Steers)

Additionally, REITs also continue to generate positive late-cycle returns and enjoy better downside protection during most recessions, as they own critical assets that remain needed. Moreover, their cash flow may not even change during a recession, as most REITs benefit from multi-year leases:

REITs outperform during recessions

REITs outperform during recessions (Cohen & Steers)

So why are REITs so cheap today?

The market seems to misunderstand REITs as investments in offices, shopping malls and hotels, which admittedly have suffered from the pandemic, and have an uncertain future due to the rise of remote working technologies, e-commerce and home sharing. Zoom (ZM), Amazon and Airbnb (ABNB) are here to stay.

But less than 10% of REITs actually invest in offices, malls and hotels.

The vast majority of REITs today invest in defensive sectors that have benefited from the pandemic. Good examples would be e-commerce warehouses, data centers, cell towers, single family homes, manufactured homes, woodlots, farmlands, etc.

These real estate sectors are doing better than ever. Rents are rising rapidly. Real estate values ​​are reaching historic highs. And yet, the REITs that own them are currently discounted due to this misperception that REITs are essentially office and shopping center investments.

But valuations won’t always be so low

If you study history, you will find that REITs, like other stocks, go through cycles of fear and greed.

Sometimes they’re out of favor, then other times they’re in high demand again. Volatility comes and goes, but based on history, REITs have a 100% chance of recovery and will become popular again:

REITs always recover

REITs always recover (NAREIT)

The key is to buy REITs when they are out of favor, which they are today.

Eventually, the narrative will move on and investors will return.

Today, they are avoiding REITs due to the pandemic, rising interest rates and possibly the risk of recession.

But as we explained earlier, these fears are mostly unwarranted. Most REITs and real estate investments have benefited from the pandemic. Rising rates are the result of high inflation, which benefits REITs. And while recessions hurt all stocks, REITs are more resilient than others, and recessions are only temporary.

We actually think that, in a weird way, a recession could help REITs. Here’s why:

  1. This will distract from the pandemic. (This is already happening);
  2. This would calm inflationary pressures; and
  3. This could lead to rate cuts or, at the very least, put an end to aggressive rate hikes.

As such, a recession could actually help REITs. They are already priced as if we were in a recession. Historically, they have been very rewarding to own at the start of the recovery when the narrative begins to shift:

REITs outperform during recessions

REITs outperform during recessions (Cohen & Steers)

Take, for example, the rapid recovery from the Great Financial Crisis: REITs nearly tripled in just two years:

REITs nearly tripled following the Great Financial Crisis

REITs almost tripled following the Great Financial Crisis (YCHARTS)

Or the resumption of the initial pandemic crash: REITs have doubled in just one year:

REITs almost doubled after the pandemic

REITs have almost doubled following the pandemic (YCHARTS)

Today, REITs are once again valued at their lowest valuations in years.

What is the next step ?

Based on history, there is a 100% chance of a strong rally, which would result in significant gains for investors buying REITs today.

If you missed REITs in early 2020 when they crashed, now is your second chance to buy them at historically low valuations. This could literally be a once-in-a-lifetime opportunity to build wealth in REITs.

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