Real estate investments have taken a bruising since Donald Trump won the presidential election, even as many other stocks, from big banks to construction firms and retailers, rallied.
But that is giving investors a moneymaking opportunity at a discount.
Real estate investment trusts are companies that own or finance real estate properties.
Based on the model of a mutual fund, they trade just like stocks on the market. They provide extremely liquid stakes in realty and pay fairly high dividends, and they will inevitably come back into favor.
Since election day on Nov. 8, the market has rallied, with the defense and infrastructure sectors delivering particularly impressive gains.
But REITs have seen declines. From Camden Property Trust (down nearly 4% in the past month) to Equinix, Senior Housing Properties, Simon Property and Vestin Realty, shares of many REITs are struggling.
Because REITs are very similar to stocks, this decline is puzzling. The best explanation for the dip in REIT prices lies in the expectation that a sustained period of higher interest rates is looming.
In theory, higher rates make less-risky income investments such as Treasury bonds more attractive to investors. However, rising rates also mean that the economy is improving, and this equals better demand for REITs.
Because REITs pay regular and often rising dividends, no matter which way rates go, they make for pretty solid investments if investors select the underlying assets properly.
A long-term view of REITs is essential to discovering how they make money without any major risks. The FTSE NAREIT All Equity REITs Index averaged a 14.4% gain annually between December 1976 and December 2015.
The hallowed S&P 500 has delivered returns of less than 7% per year over the past 15 years, even when including gains from equity dividends.
So REITs are undoubtedly solid return generators, according to Morningstar.
Investors should invest in REITs for three main reasons.
First, during a Trump administration, commercial real estate could stand to benefit from fiscal stimulus, lower tax rates and rising business confidence.
Second, Trump's plans are clearly aimed at more job growth, which will surely lead to higher demand for apartments. There are many REITs that specialize in these type of properties.
Finally, health care REITs have been slammed on fears of a complete repeal of the Affordable Care Act. Care Capital Properties is down 21%-plus year to date, Omega Healthcare Investors is down 16% and Welltower has lost 3.6% in the past month.
But whatever Trump does to the Affordable Care Act, he can't do anything to change the demand for lower-cost outpatient needs and prevent medical office rent growth. That makes these REITs particularly juicy deals.
So which REITs look promising? Check out these three:
Digital Realty owns and runs data center properties globally and leases them to tenants such as IBM and JPMorgan Chase. Data storage needs space (read: real estate), and this is projected to keep the industry's growth near double-digit rates.
The company has gotten out of risky skilled-nursing properties, making the REIT an even safer and more stable proposition.
Realty Income's properties include cinemas, dollar stores, drug stores, gas stations and even warehouse clubs and provide the REIT with a great recession hedge and a stable source of revenue.
With healthy dividends, REITs continue to be great investments, and this is the perfect time to get in at a discount.
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