Unfortunately, not everyone can afford the costs of buying and flipping a house ($100k+), let alone find access to the OTC gold desks. However, that doesn’t mean that people weren’t profiting from the rush back into hard assets. Real Estate Income Trusts saw some fantastic returns over the last few years, and continue to show good prospects for the foreseeable future. Given the appealing nature of this continuing trend, I’m going to dedicate the next two articles to discussing two ways to benefit from the high yields and low volatility of apartment and commercial REITs.
Apartment REITs have benefitted greatly from the economic down-turn for three main reasons. Firstly, as people found the value of their property decreasing throughout the recession (to the point of foreclosure for many), they began to sell off their properties and turn to renting. Companies that owned apartment properties began to experience a surge in demand, which allowed them to safely increase their rent, and even expand their operations. This increased their revenues.
Secondly, Apartment REITs benefitted by the dramatic lowering of interest rates that followed. Having access to cheap mortgages, the company was able to safely expand its operations with very low risk, while also reduce the costs of continuing business. This improved the company’s profit margins. Lastly, Apartment REITs benefitted from the recession because their book value consists entirely of tangible assets.
While the government was implementing an aggressive inflationary policy that diluted the value of cash, the value of the physical assets would scale with the rate of inflation. Coupled with the way in which the inflation diluted the nominal value of the debt that the REITs were using to scale their operations, they provided a fantastic opportunity for securing returns against an unstable market. All of these factors increase the distributions of these companies, which lead to an increase in the value of the equities themselves. Sounds exciting right?
Unfortunately, the greater returns for REITs have likely already been factored in to their price points. However, the yields are still aggressive enough to make them appealing, and the tangible value will always remain. This means that REITs still provide a fantastic opportunity to increase the returns from a fixed-income portfolio.
Granted, they would represent the more aggressive portion of the portfolio, but they arguably provide a much more appealing opportunity than some of the other dividend-paying companies right now, and can help to diversify a bond portfolio by just enough to justify the decision. Depending on what you’re already holding, it might be worth it to talk to your advisor about whether or not an Apartment REIT is suitable for you in 2012.