REITs (real estate investment trusts) come in all shapes and sizes. To ask if they are defensive is to ask a simple question that has a complex answer. However, we’ll break down this question and try to arrive at a simple conclusion.
REITs as a Defensive Investment
When we talk about defensive investments, these are investments that generally do well when the economy goes into a downturn. That is the context we’ll try to answer if REITs are defensive investments.
To make a blanket statement that REITs are defensive is to leave out a lot of context. Yes - some REITs can be defensive while others are not. This is because there are many different types of REITs.
To understand which REITs are defensive vs. those that aren't, we must examine various REIT categories, including private and public.
Expectations of REITs In a Downturn
REITs can provide a steady stream of income, even during a downturn. However, this stream of income can fluctuate. If a REIT loses tenants during a downturn, overall income will decrease. So, while an investor may receive income from a REIT during a downturn, there is a chance that income will decrease.
Some REITs are more sensitive to economic downturns than others. REITs with exposure to shopping malls, hotels, offices, and high-end luxury may lose value in addition to decreased income.
On the other hand, sectors such as health care, infrastructure, and residential can do well during an economic downturn.
REITs that aren’t correlated with economic cycles can also do better during an economic downturn. Various areas of infrastructure sit within this category. Telecommunications is one such example. This sector isn’t as sensitive to economic cycles.
Healthcare companies have inelastic demand. No matter what the economy is doing, there is always demand for their services, creating income stabilization. REITs with exposure to health care are involved in developing, managing, and leasing properties to hospitals, physicians, outpatient properties, and multi-tenant medical office buildings.
Public REITs
Public REITs are those traded on national stock exchanges such as the NYSE. These REITs behave very similarly to stocks. Being listed on a national exchange usually means liquidity since people can buy and sell these REITs anytime without much concern that they’ll lose value due to a lack of liquidity.
This is a double-edged sword since, during times of distress, people can easily sell their REITs, which can quickly drive down the price of those same REITs.
For that reason, publicly traded REITs can be vulnerable during a downturn when people may favor selling their stocks rather than keeping them.
Private REITs
Private REITs are illiquid. While illiquidity can be a disadvantage when an investor needs to sell their investment, it can provide protection from volatile markets. When the stock market is swooning lower, private REITs may remain stable. This is because price discovery is not instant with private REITs like it is with public REITs.
While private REITs can provide the illusion of low volatility, it's not uncommon for them to eventually align with public REIT valuations as private market price discovery eventually surfaces.
Some private REITs are restricted to accredited investors. So, not everyone will have access to them.
Note that the same sector correlations mentioned above apply to public and private REITs.
Some REITs can be considered defensive investments. However, it depends on the economic cycle and specific sector performances within real estate.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.
Hypothetical examples shown are for illustrative purposes only.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
There are risks associated with these types of investments and include but are not limited to the following:
- Typically, no secondary market exists for the security listed above.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
