Real estate investment trusts (REITs) have had a tough year as rising interest rates have dampened market demand, triggering a bearish consumer sentiment. The housing market has witnessed the fastest cooling since the subprime crisis of 2008 with home sales declining for nine consecutive months as of October.
This can be an ideal investment opportunity, as real estate has historically provided consistent returns. The Blackstone Real Estate Income Trust Inc., which is down nearly 40% year-to-date amid heightened market volatility, has generated double-digit compounded returns over the past six years.
What Are Diversified REITs?
Diversified REITs invest in various types of real estate, including residential and commercial, making them one of the most diversified real estate portfolios. Diversified REITs focusing on only commercial properties generally invest in office buildings, hotels and resorts, industrial and retail properties. Most diversified REITs have a specific investment strategy and focus on a handful of property types rather than investing in all types of residential and commercial real estate.
Benefits of Diversified REITs
Low risk: Certain types of real estate, such as housing, are more susceptible to market volatility compared to others. The Federal Reserve’s hawkish pivot since the start of the year has caused home sales to fall by nearly 30% year over year as of October. But industrial real estate has remained relatively resilient, thanks to billion-dollar government incentive packages. Diversified REITs invest in various types of real estate, mitigating the risk of losses if a specific sector underperforms.
Predictable income stream: Even if one sector underperforms, diversified REITs have a steady source of income from other real estate investments. They are relatively recession-proof, making them ideal investment options during a market downturn.
Risks with Diversified REITs
Interest rate risk: The Federal Reserve has raised the benchmark interest rates seven times this year to the highest level in 15 years. This has raised the cost of borrowing significantly, making real estate investments more expensive. As the tumultuous economic headwinds continue, demand has remained comparatively flat, reducing the revenue sources and profit margins of REITs.
Sector-specific headwinds: Certain types of real estate are more affected by market conditions, particularly residential real estate and office space. Home sales fell for the ninth consecutive month in October, while homebuilder sentiment is at a 10-year low.
While commercial office spaces have seen an uptick in demand lately, permanent remote working structures are being tested and adopted by various companies. It is unlikely that office occupancy will go back to prepandemic levels. Such sector-specific headwinds might cause diversified REITs to register significant losses.
How to Invest in Diversified REITs
Most diversified REITs are publicly traded and listed on U.S. stock exchanges. Investors can buy and sell units of listed REITs during stock market hours from 9.30 a.m. to 4 p.m. Eastern Standard Time (EST). Some of the best online stock brokers through which diversified REITs can be traded are:
Best Diversified REITs
W.P. Carey Inc. (NYSE: WPC)
With a $22 billion value, W.P. Carey Inc. (NYSE: WPC) is one of the largest diversified REITs in the world. It owns and operates 1,428 net lease properties and has a 98.9% occupancy rate as of Sept 30. It specializes in acquiring and operating single-tenant properties across North America and Europe.
W.P. Carey has benefitted from the surging rental rates, driving its revenues up by 17.7% year-over-year in the third quarter. The REIT raised its cash dividend to $1.065 per quarter earlier this month. It pays $4.26 as dividends annually, yielding 5.29% on the current price.
JBG SMITH Properties (NYSE: JBGS)
JBG SMITH Properties (NYSE: JBGS) is a prominent diversified REIT operating 15.6 million square feet of high-growth multifamily, office and retail assets and 9.8 million square feet of mixed-use future development land. The S&P 400 company pays $0.90 annually in dividends, translating to a 4.48% yield.
JBG SMITH received a five-star rating from GRESB and was recognized as a global leader in the diversified REIT space. "The achievement of a five-star rating for a third straight year in our standing assets along with a five-star rating in the development assessment for the second year in a row demonstrates tangible results in the execution of our sustainability strategy and consistent industry leadership," JBG SMITH CEO Matt Kelly said.
|Number of REITs||12|
|Average Dividend Yield||8.66%|
|YTD Total Return||-23.24%|
|September Total Return||-12.67%|
|2023 Total Return||-15.73%|
Quarterly Performance Data
|Financial Metric||Q3 2023||2023 YTD|
|Dividends Paid ($)||$492||$983|
|Same Store NOI||4.75%||-|
All Diversified REITs
Frequently Asked Questions
Are diversified REITs a good investment?
Yes, diversified REITs are a good investment option.
How do diversified REITs do in a downturn?
Diversified REITs perform better than sector-specific REITs in a volatile market or recession
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