How Does Inflation Affect REIT and Stock Performance? (2024)

FAQs

How Does Inflation Affect REIT and Stock Performance? ›

U.S. REITs Performance in Inflationary Environments

Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

Here's an explanation for how we make money . More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.

REITs Outperform Stocks During Recessions

Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.

Its limited supply and consistent demand drive property values higher during inflationary periods. Rental income, which can increase with inflation, provides a steady cash flow. Real estate offers a sense of security as a tangible asset & its value tends to appreciate over time, preserving purchasing power.

As interest rates rise, they can depress the price of these REITs. So while dividends may climb with interest rates, the price of publicly-traded REITs may decline. Historically, REITs are one of the better-performing sectors during inflationary periods.

Demand is healthy while supply is constrained. And REIT valuations relative to the broader equity market are meaningfully below the historical median. There are three key reasons to invest in listed REITs right now, starting with the fact that REITs have outperformed stocks and bonds when yields and growth move lower.

REITs posted total returns north of 5% for the month, although they remain in negative territory year-to-date. On the heels of a rough month of April, the FTSE Nareit All Equity REITs Index mounted a comeback in May with total returns up 5.29%.

REITs Could Offer Investment Opportunities in 2024

Though 2022 and 2023 were challenging years for REITs, the recovery is likely on the horizon.

The trend started to reverse in late 2023, with the REITs posting a 17.9% return for the fourth quarter. And it will likely continue in 2024 as multiple factors converge to create a favorable environment for the sector, according to REIT fund managers.

Can REITs go broke? ›

REIT bankruptcies have indeed been a rarity since the REIT debacle of the mid-1970s, when high leverage and highly speculative real estate investments resulted in numerous REIT failures. Thereafter, REIT managers became far more conservative in their investment and financing practices.

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.

Gold investments have proven to beat inflation rates as it has been observed that gold prices rise with an increase in inflation rates. Note – Gold jewellery involves various costs like making charges, storage & insurance costs, GST, etc.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.

The overall business performance of the S-REIT sector has been lacklustre and some segments of the industry have not been able to recover to pre-COVID levels, either due to a change in business dynamics or due to an inflationary environment. Office REITs have faced challenges due to the new work-from-home (WFH) trends.

In short, studies show that REITs are more rewarding investments because they enjoy: Significant economies of scale. Better access to capital. Development capabilities to earn better yields and create value.

Mortgage REITs were affected by the sharp rise in interest rates during 2022 and 2023, and again have been under pressure on the “higher for longer” news. Even as its floating rate portfolio hasn't been directly squeezed by rising rates, BXMT stock is not out of the woods.