Why REITs are a Good Investment in the Pandemic

Jan 6, 2021 05:41 PM ET
Why REITs are a Good Investment in the Pandemic
  • Low yield in risk-free investments, such as the 10-year Treasury bond, has forced investors to seek income-generating activities, especially in real estate.
  • REITs have had strong returns before the Pandemic due to a strengthened mortgage system.
  • Shares of AMT have attracted a dividend yield of 2.19%. The stock price increased at a rate of 121% in the past five years.

Despite the decline in income levels, the low mortgage rates and decreasing risk-free bond yields have led to the rise in the US real estate industry. Investing in real estate investment trusts (REITs) may also bring substantial returns at this time in the wake of the COVID-19 Pandemic. Investors use REITs to buy and earn shares from real estate portfolios. Income for these publicly-traded companies also comes from property holdings.

State of the Housing Market

Covid19 has adversely affected commercial real estate companies with the rise of unemployment levels throughout 2020. Employees in the corporate sector have also been forced to work from home. This situation has decreased ownership of office buildings leading to a reduction in rental income.   

Popular REITs such as the American Tower Corporation (AMT) have seen a decrease in their market capitalization by 3.47% this year.

Popular REITs such as the American Tower Corporation (AMT) have seen a decrease in their market capitalization by 3.47% this year

The dividend yield-money earned by AMT shareholders-is 2.19% at a 4-year average of 1.83%. The share price will enter 2021 at a high of $220, meaning investors are poised to earn big. In the last five years, AMT's share price has increased by 121%.

However, a five-year analysis of the company shows that AMT shares have gained 124.73%. Revenues rose by 58.87% to a high of $7.58 billion in 2019 from $1.985 billion in 2010.

American Tower Corporation price 

The US House Price Index (HPI), released on December 23rd, 2020, had fallen by 0.2% from a previous reading of 1.7% to 1.5%. It indicated an adverse movement in the prices of family houses, especially those backed with mortgages.

The Great Recession of 2008 was the result of increased housing demand beginning in early 2000. Owing to the increasing residential market, lenders relaxed their mortgage loan approvals for home buyers. Individuals with poor credit scores were awarded subprime mortgages leading to defaults that the banks could not cover. However, in 2020 credit availability has been regulated with the tightening of credit scores. Most US banks require home buyers to have a FICO score of 740+ before they are eligible for a mortgage loan.

The conventional mortgage (fixed) rates are shown in the table below.

Term (Fixed)

Rate

APR (rate charged annually)

30 years

2.750%

2.817%

20 years

2.750%

2.845%

15 years

2.250%

2.372%

10 years

2.250%

2.429%

Source: 

    mortgage credit availability index

High financing costs for real estate developments mean that there is still an undersupply of residential and commercial products. For AMT, property expenses have risen by $1.73 billion in the ten years.

An investor should understand that REITs are right when traded like shares and provide a good platform for purchasing real estate developments. Typically, investors use REITs to borrow cash for financing property developments.

Risks

The main risk for REITs is that they are susceptible to fluctuations in interest rates. REIT stock is adversely affected by volatility in the market. The decrease in interest rates means a subsequent decline in the yields from risk-free investments such as the Treasury 10-year bond.

On a positive note, when the Treasury yields decrease, the REIT investor will benefit from selling income-generating activities other than government bonds.

American Tower Corporation price

A look at the graph above shows that, since 2016, the 10-year Treasury bond has decreased by 59.48%. In that same time, AMTs stock has gained by 121.8%, and revenue increased by 58.87%.

At this time, investors prefer to invest in income-generating activities as opposed to buying Treasury bonds. There is an inverse relationship between risk-free yields, such as government bonds, and the REITs' price or revenue.


Best Forex Robots