The index, which has 132 constituents, represents about 99% of the U.S. REIT universe. Last year, the MSCI US REIT Index gained 42%, compared to the S&P’s increase of nearly 27%.
Their underperformance this year can be pinned to rising interest rates, since investors who have REITS for their high dividend yields may dump the assets for risk-free Treasurys. Those Treasury yields have been climbing this year, with the 10-year yield at one point topping 4% last week.
On top of that, while REITS have been historically known as hedges against inflation, that isn’t the case this time around, according to a recent Morningstar report.
The assets won’t immediately feel the benefit of higher inflation and might even see negative effects due to several reasons, including the fact that many sectors won’t be able to react with rent increases due to long-term leases, Morningstar senior equity analyst Kevin Brown wrote in the report. Inflation also drives up operator costs, the price of building materials and labor costs, he pointed out. In addition, the REIT market has significantly changed over the years.
As a result, REITS are generally undervalued, Brown said.
“The long-term fundamentals for the sector are still healthy and strong and that should support growth of the stocks over the next three years,” he told CNBC.
How should you invest in REITS?
There are several things to take into account when deciding whether to invest in REITs and what to buy.
For one, REITs should be an intermediate- to long-term investment. They should also be part of an overall diversified portfolio.
“To determine the amount of your portfolio that should be allocated to alternate investments such as REITs, keep in mind your time horizon, your income needs, the tax efficiency of your portfolio and, of course, what is the end play,” advised certified financial planner Omar Morillo, founder and senior wealth advisor at Imperio Wealth Advisors in Miramar, Florida.
(sourcel:CNBC)
