REITs are making a powerful comeback in post-lockdown India

In this article you will read about

• REITs Powerful Comeback
• Benefits of investing in REITs
• DIY strategies of the smart investor

REITs are making a powerful comeback in post-lockdown India
As of this Diwali, investors have enjoyed a long spell of benevolent markets, with NIFTY and Sensex scaling new heights all through 2021 and the rallies remaining widespread. However, as always, the ups can be followed by downs. With the current inflationary trends and possible rise in interest rates, investors would do well to ensure their portfolios account for the expected volatility. Diversifying their portfolio with negatively correlated and alternate assets is one such proven strategy.

In such a scenario, Real Estate Investment Trusts (REITs) offer an effective alternative. It can provide an improved diversification strategy for investors looking to reallocate portions of their fixed income portfolio with an eye on a potential rise in interest rates. A REIT is a company that owns, operates or finances real estate that produces rental income and provides an investment opportunity, like a mutual fund, that lets investors benefit from valuable real estate, and to access dividend-based income and total returns.¹ REITs help provide capital appreciation as well.

Globally, most REITs are publicly traded unlike physical real estate investment, are therefore highly liquid, and invest in a wide range of property types including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, warehouses, cold storage, self-storage and senior living facilities. Hence, Global REITs capture a larger number of themes for diversification, better than domestic REITs which largely cover commercial or residential properties currently. Historically, global REITs have offered the highest long term returns at 10.4% as compared with investment alternatives like private real estate (8.5%), stocks (7.5%) and bonds (4.5%).

REIT and particularly Global REITs is a highly worthy asset class to add to investors’ portfolio.

Covid-19 lockdowns saw governments and central banks pump in a lot of liquidity to reignite demand and save economies from sinking, which may eventually lead to the creation of asset bubbles in the market. Hence, investors need to reassess their existing asset allocation and realign investments with the evolving trends in various asset classes and the inflation-interest rate dynamic going forward.

Multi asset investment is commonly regarded as the more resilient way to go forward. It involves investing in low correlation or negatively correlated asset classes so that when one asset class is underperforming, the other one makes up for it by its good performance to balance the portfolio returns. Studies show that 92% of investor returns are the result of cogent asset allocation, whereas just 8% of returns are based on stock selection and timing² .

Many investors do their own asset allocation through dynamic asset allocation by switching from debt to equity and vice versa. Some investors follow a fixed asset allocation like 60:40 in favour of equity or debt, based on their life cycle stage or age criteria.

In either instance, investors refrain from taking interest rate or credit calls on the debt portion as debt is only temporary, symptomatic solution, which gets switched into Equity as and when equity valuations become cheaper. In the current times of low interest rate across the globe, this allocation to Debt generates negligible returns and drags down the overall performance of investor portfolios.

Global inflationary pressures present a suitable time for REITs to outperform bonds and stocks. Increased prices lead to an increase in real estate rents as leases are directly tied with inflation. The current economic state is prone to rising inflation. This is advantageous for REITs as high inflation rates also reflect in higher rental incomes. REITs can function as a natural hedge against the current inflationary environment. In the past, they have outperformed other asset classes especially in a moderate inflation scenario.

Over the past four decades, REITs Index has performed better than S&P 500 by 2%, while in the past five years stocks have outperformed REITs. However, higher inflation would allow REITs to have a strong come back. Indian investors can now gain a lot from global REITs in terms of diversification in geography and currency. It adds an attractive, new dimension to the investor’s portfolio.

The post-lockdown, vaccinated economy is bound to make bigger comebacks and serve the REIT asset class further as markets stabilise and grow.

¹https://www.reit.com/what-reit
²https://economictimes.indiatimes.com/money-you/right-asset-allocation-hold-key-to-maximising-returns/articleshow/4949881.cms?from=mdr