It’s hard to find good yields on the usual investments nowadays, which is why people are more attracted to REITs, or real estate investment trusts. A headline in Bloomberg on Sept. 13 announced, “REITS Attract Most Cash Since 2006 as U.S. Investors Seek Yield.” In fact, Bloomberg reports that investors have added $3.7 billion in new funds just this year, bringing REIT funds (including both mutual funds and ETFs) to $96 billion.
It’s all about the yield, which, according to Morningstar Inc., has averaged about 5.75% over the past 20 years for equity REITs. So, what’s not to like about REITs? Timing.
The past 20 years were marked by long periods of growth in commercial real estate. As businesses grow, they require more space and spend more money to rent it, thus providing REITs with the cash flow to feed their dividend.
However, if you believe, as EWI does, that the next few years will start off on a more bearish footing with businesses continuing to contract, then REITs are not where you want to put your money. As Robert Prechter writes in his best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression:
Make sure you avoid real estate investment trusts, which are perhaps the worst property-related investments during a bear market. Some REITs valued at $100 a share in the early 1970s fell to ¼ by late 1974, and most of these never recovered. REITs are sold to the public because the people who do the deals don’t want to stick with them. The public falls for REITs cycle after cycle. These “investments” hold up in the best part of bull markets, but they are disasters in bear markets.
-- Conquer the Crash, Chapter 16, “Should You Invest in Real Estate?”
Prechter has been joined by others who recognize the pitfalls of investing in REITs. For example, Ralph Block, one of the people quoted in the article who has published a guidebook called “Investing in REITs,” says, “For anybody to make an investment, it requires some kind of faith in the future. It requires faith that businesses are going to be profitable, they’re going to want to grow, they’re going to want to take more space. If you don’t think any of that’s going to happen, you shouldn’t be investing in REITs.”
There’s a better way to handle your personal finances during volatile, bear markets than to try to seek yields and appreciations that are risky. Try a subscription to Elliott Wave’s Financial Forecast Service to get the big picture of where the markets and the economy are headed and how you can best prepare for the downturn.
-- Part 2 and Part 3 are now posted.
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