06.12.2021 20:00

Are REITs Safer than Stocks in a Economic Downturn

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How safe are REITs during an economic downturn? The real estate investment trusts are famously known for yielding income for their investors.

A REIT corporation runs different real estate properties and pays about 90% of generated income to shareholders in dividends form. Consequently, investors can be given a steady income flow, which is attractive due to its low-interest rate provisions.

Do you want to invest in REITs? While REITs come with risks you should consider before putting your money in them, it’s safer than stocks in an economic recession. Let’s find out how.

How are REITs safer than stocks?

Investing in REITs is a great way to save investors hedging against volatility. One can access returns without undergoing direct ownership challenges. However, is it a safe investment method during a recession?

The answer is definitely yes. The investment involves large-scale real estate, including hotels, resorts, mortgages, warehouses, and office buildings, unlike having one commercial asset that can easily tumble during an economic disaster.

With the looming economic uncertainties, it’s best to diversify your assets to be safe. The below discussion tells us why;

Regular business will largely be affected by an economic shock long before it hits an average REIT. A good example is a textile industry that could reduce service, cutting its order book to half from one to the following.

On the other hand, it is usually described as a conservative property. It’s a mere combination of some piece of the planet called land and structured made and developed by man.

That’s why it’s a tangible asset with value to its occupants. Its value can be termed as relevant, flexible, and limited, making it stable and durable.

Real estate is relevant because shelter is a basic need, and everybody needs to live. Furthermore, people need a place to grow food, factories for goods production, and warehouses for storing goods for sale or consumption and use. In other words, real estate is more important for human survival and prosperity, which is hard to replace.

Flexibility is seen through how one building can serve various functions even without making changes to it.

Sometimes small changes or renovations may be required but be sure it’ll come with some profit later. It’s the reason why a building currently having an unprofitable business isn’t a waste because its flexibility gives it value.

About real estate is limited, it only implies the land size on earth isn’t infinite. It has only specific zones that are suitable for human settlement and farming- for instance. The Sahara desert doesn’t support farming.

The three qualities are the main reasons real estate can’t easily be worthless. The only misfortunes can arise from mismanagement and overleveraging.

REITs are especially affected due to numerous portfolios with dozens or hundreds of professionally managed investments have limited leverage. This helps become resilient to a recession. On the contrary, stocks come and go like Amazon replaced Sears, Nokia with Apple, among other examples.

The best REITs for a recession

QTS Realty Trust, Inc.

Data centers are among the real estate sectors secured from an economic downturn. Regardless of the economic status, every company needs its data well and safely stored, and QTS plays a major role.

The QTS shares price rose by 85% in 2019. While there was a recession, its stock achieved a new 52-week high in April. The current working situation by most Americans has also benefited QTS. Many data centers are active, and even QTS recorded a 30% increase in clientele due to the guideline on working from home.

Several Americans are finding it hard to work remotely. For QTS, it means they should focus on the internet and online workplace as their main goal. That is to imply that data centers remain essential despite what the economy says. Therefore, it’s a wise decision to invest in it.

American Tower

Apart from data centers, communication sites are another real estate firm that weathers an economic shock. The American Tower leases telephone tower spaces to prominent corporations for installing communication tools.

The company owns various towers that provide service to your phone. It also underwent a great income change in 2019- for example, they experienced over 70% increase between 2018 Dec and 2020 April.

Equinix Inc.

Equinix is also a data center in the real estate industry, just like QTS, though it’s much stronger. It’s the biggest globe’s data center- facilitates 205 centers in 25 nations among five continents.

It grew more than QTS in 2019 by over a 97% increase. The company is known to play in data storage with big organizations and other companies such as Amazon, Microsoft Azure, and Google cloud. Again, it gives huge dividends, 1.56% yearly, and recently in February 2020, it staggered $2.66 per share.

Being a worldwide leader in data centers and not forgetting the high dividends earned should be among the best REITs to pick from when investing.

Equity Residential 

Multifamily housing and Apartment building REITs can pass through a recession for one reason; shelter is a basic requirement for people. Generally, multifamily houses undergo minimal rent declines and are likely to recover after quickly.

Residential apartments are among the most real estate properties in demand all over America. While the market experienced volatility recently, the share price has been steady, starting in August. Investors yielded a 2.6% dividend price.

The bottom line

In an economic downturn, it’s safer to invest in REITs than stocks. It’s because, in history, REITs have performed properly during recessions.

They also are highly durable and more stable than other businesses. Additionally, most properties have cash flows with high resilience to recessions.

Some of the best investments to survive a recession include Equinix, American Tower, and QTS Realty Inc., among others. They’re much stronger and not likely to struggle like other industries.

Their returns are also solid due to lease payments involved and not market fluctuations. For these reasons, you should have them on your list when choosing REITs.

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