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REITS for a Property Mogul Presidency 

By Richard Stavros on January 18, 2017

President-elect Trump’s announcement at his press conference last week that he would not sell his ownership stake in his real estate empire, but pass management on to his sons, was seen as bullish for global real estate. (Though not so great from an ethical point of view, according to many experts.)    

To be sure, the property mogul’s plans to reinvigorate growth through tax cuts, deregulation and infrastructure spending could be a boon to the Real Estate Investment Trust (REIT) sector, and REIT dividends are likely to beat ultra-low government rates for some time.

REITS, as I will explain, are also one of the best inflation hedges, and inflation is expected to increase as a result of Trump’s stimulus policies.

But, in my opinion, the best reasons to invest in REITS right now is first as an income hedge until it becomes clear how effective these new policies will be, and we may not know that until 2018 at the earliest. The second top reasons are the sector’s fundamentals and the economic environment couldn’t be better for real estate.  

The growth of the REIT sector is still expected to be 3.5% in 2017 and 3.2% in 2018. This puts property-level growth well above inflation, and still translates into 5% to 7% earnings and dividend growth, according to a forecast by investment bank Lazard.

Further, strong performance was evident in sectors with the shortest duration leases (hotel, multifamily, and self-storage). These sectors would benefit most quickly from accelerating real estate demand due to these short lease terms.

And the S&P/Case-Shiller 20-City Composite Home Price Index has now recouped 80% of the losses experienced during the US housing bust, with more room to grow. “House prices are still down 7% from the pre-crisis peak in aggregate,” Lazard noted, and house price recovery has been very uneven with high-income areas at all-time highs, while low-income areas are still suffering from large declines.

And late last year, bond rating agency Fitch said it would maintain its stable rating on U.S. equity REITs this year. The consistency with which the U.S. equity REIT sector has adopted and maintained credit-friendly financial policies supports a positive outlook for the sector outlook, according to Fitch Ratings.

If  Inflation Takes Off

When considering the various protection options during inflationary periods, Wharton academics Brad Case, Susan Wachter and Richard B. Worley, found the two assets providing the most dependable inflation protection have been commodities and equity REITs. , Commodities provided total returns that equaled or exceeded inflation during 70.4%of high-inflation periods, with and REITs close behind at 65.8%.

Stocks and Treasury inflation-protected securities (TIPS) have provided somewhat weaker inflation protection by this measure, with stocks protecting purchasing power during 60.8%of high-inflation six-month periods and TIPS even lower at 53.8%.

By the study’s measure, the weakest inflation protection among this group of assets has been provided by gold,

According to the study, the two property sectors that provided the most effective inflation protection with returns greater than or equal to inflation during high-inflation periods were self-storage (81%) and residential (77.8%). These two property types are characterized by short lease terms, and therefore frequent lease turnover and renegotiation.

Lodging, the third property type characterized by short leases, demonstrated a success rate of 68.3%, less than the equity REIT industry as a whole (71.4%). Shopping centers, too, provided inflation protection dependability above that of the industry as a whole (73% =), but the other two retail property types, regional malls (69.8%) and especially free-standing retail (61.9%), fell short of the industry average, as did other property types including office (69.8%) and healthcare (68.3%).

Not all REITs are great buys though. Some borrow too much, for example, and as rates rise they’ll be under pressure. However, less leveraged REITs and those that operate in other countries won’t be as heavily affected as interest rates drift higher. They also have the ownership advantage of raising rents when the economy heats up, increasing cash flows along with the pace of inflation.

In the next few weeks,in Personal Finance we will be expanding our portfolio of REITs given these improving economic fundamentals favoring the sector, and of course, because owning real estate is going to be very presidential.   




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