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Table of Contents
First, what are real estate stocks?
Companies that own or manage real estate are known as real estate stocks. Real estate investment trusts (REITs) are included in this category.
A REIT is a particular class of publicly traded businesses that enables individual investors to own shares in real estate portfolios that generate income from a variety of assets. They make it simple for investors to invest in businesses that own, develop, and manage residential, commercial, and industrial properties, which is a part of the real estate industry.
REITs are obligated, among other things, to distribute at least 90% of their taxable profits as dividends. Funds from operations (FFO), a measure of earnings specific to the industry, is a crucial REIT indicator.
American Tower Corp., Crown Castle Inc. and Prologis Inc. are among well-known companies in the industry.
As more people throughout the world have gotten used to working from home, the COVID-19 pandemic’s effects have severely disturbed the commercial real estate market. Some businesses have relocated to new commercial office buildings, while others have repurposed their current offices, and still others are remodeling them.
The Federal Reserve‘s recent increases in interest rates have resulted in a substantial halt in price growth for both commercial real estate and residential real estate in recent months.
Depending on the type of investment, purchasing real estate stocks may offer your portfolio a steady stream of income as well as tax benefits.
Understanding Real Estate Market Dynamics
Investing in real estate stocks ties directly to the pulse of the broader real estate market, making an understanding of market dynamics crucial for informed decision-making. Here’s a closer look at several elements shaping the real estate market and, by extension, the performance of real estate stocks.
Economic Indicators and Real Estate Stocks
Economic indicators like GDP growth, unemployment rates, and consumer confidence indexes are significant determinants of the real estate market’s health.
A resilient economy with low unemployment rates and high consumer confidence usually bodes well for real estate stocks, as it signals robust demand for real estate. On the contrary, economic downturns often lead to diminished demand, affecting the performance of real estate stocks.
Interest Rates: A Double-Edged Sword
Interest rates significantly influence the real estate market and, subsequently, real estate stocks. Lower interest rates typically favor real estate investments by reducing borrowing costs for consumers and developers. However, the current scenario reveals a different tale.
As of late 2023, mortgage rates have been on a rising spree, with the national average 30-year mortgage rate reaching 7.79% in the week ending October 26, 2023. This rise in rates has led to a slight dip in year-over-year existing home sales, marking a 0.7% decline for the third consecutive month.
Federal Reserve’s Role
The Federal Reserve’s actions, aimed at controlling inflation, play a crucial role in this dynamic. For instance, the Federal Reserve has been incrementally hiking the federal funds rate, which indirectly influences mortgage rates.
The federal funds rate reached a range of 5.25% to 5.5% after 11 rate hikes, marking the highest point in 22 years. The projection suggests that the rate will likely hit 5.6% by the end of 2023, hinting at at least one more 25 basis-point rate increase within the year.
Demand and Supply Equilibrium
The equilibrium between demand and supply in the real estate market is a critical determinant of real estate stocks’ performance. Urbanization trends, population growth, and housing affordability are vital factors in this equilibrium.
However, the current market scenario shows a competitive housing market with demand continuing to outstrip supply. Many homeowners, enjoying low interest rates, are reluctant to sell, exacerbating the supply-demand mismatch.
Housing Affordability Crisis
Rising mortgage rates, elevated home prices, and constrained housing inventory have led to a housing affordability crisis.
The National Association of Realtors reported a near-record median sale price of $406,700 in July 2023, despite the highest mortgage rates in over two decades. This situation creates a challenging environment for potential homebuyers and, by extension, impacts the performance of real estate stocks.
Best Real Estate Stocks to Invest In: The Types
Real estate stocks can be broken down into sub-sectors based on their businesses, much like any other sector of the stock market. Typically, the following sub-sectors make up the real estate sector:
Residential. Companies that specialize in owning and leasing residential real estate, such as apartments, condos, and executive housing, make up residential real estate stocks.
Commercial. Stocks of commercial real estate companies typically hold, manage, or create office or retail space for a variety of enterprises to occupy.
Healthcare. Healthcare-related facilities, such as senior housing, assisted living facilities, and post-acute care facilities, are purchased, built, or managed by healthcare real estate stocks.
Specialty. In addition to REITs, which engage in fundamental property categories including residential and commercial real estate, there are other specialty stocks that invest in assets like entertainment spaces and other venues.
Equities that invest in activities unrelated to real estate are available in addition to the many kinds of real estate stocks that own, manage, or develop physical assets. Among them are businesses that invest in different mortgage-backed assets, such as mortgage REITs.
Best Real Estate Stocks to Invest In: The Pros
Diversity. Real estate stocks allow investors to purchase a single share of ownership that represents a whole portfolio of properties.
Liquidity. Investors can invest in actual properties through publicly listed real estate stocks without having to find, acquire, and maintain the assets themselves. Additionally, if shareholders require access to cash, they can sell shares much more quickly.
Competent management. In order to optimize shareholder value, real estate businesses provide shareholders with a layer of expert management that is dedicated to managing the company’s portfolio of properties.
Gains from taxes. Companies that lease real estate to generate passive revenue benefit from a number of significant tax advantages.
Earnings on a regular basis. Regular dividend payments dependent on the size of the investment are frequently made to shareholders of REIT shares.
Best Real Estate Stocks to Invest In: The Risks
Management fees. While competent management is a benefit to real estate stock holders, it has a price tag on it. The net operating income of a real estate company can be significantly reduced by manager salaries and benefits.
Sluggish growth. REITs are typically low-growth investments, in contrast to tech stocks and some other more volatile assets. Usually, they provide the most value to stockholders through consistent dividend payments.
Interest rate risk. Interest rate changes put investors at risk since real estate businesses frequently finance the buildings in their portfolios. A corporation may produce less net income that can be distributed as dividends if interest rates increase.
Possible market reversals. Periodic market downturns are common in the real estate sector, particularly during recessions. Examples from more recent history include the 2008 financial crisis and the commercial real estate market collapse during the COVID-19 pandemic in 2020 and 2021.
Best Real Estate Stocks to Invest In: How to Buy Real Estate Stocks
Investors can use a brokerage account or a tax-qualified retirement account, such as an individual retirement account (IRA), to buy real estate stocks. Investors may occasionally even be allowed to make investments through a 401(k) account provided by their employer.
Also keep in mind that investing in individual stocks carries a higher risk than purchasing a diversified fund, especially when those stocks are backed by tangible assets like real estate. Therefore, before making an investment, investors must conduct in-depth due diligence on companies and evaluate their financial situation.
Financial advisers frequently advise clients to diversify their investments by using funds like exchange-traded funds (ETFs) or index funds, albeit many investors prefer to trade in certain stocks.
Tax Implications of Investing in Real Estate Stocks
Investing in real estate stocks comes with its own set of tax implications that can significantly affect the overall returns on these investments.
Being well-versed with these tax facets is not only crucial for compliance but also for making informed investment decisions. Here’s a breakdown of key tax considerations associated with investing in real estate stocks:
Capital Gains Taxation
Short-term and Long-term Capital Gains
When you sell real estate stocks at a profit, the gains are subject to capital gains tax. The rate at which these gains are taxed depends on the holding period.
Gains from stocks held for less than a year are considered short-term and are taxed at your ordinary income tax rate. Conversely, gains from stocks held for more than a year are considered long-term and are taxed at a reduced rate.
Dividend Taxation
Real estate stocks often pay dividends to shareholders, which are subject to taxation. The tax rate on dividends from real estate stocks can vary based on several factors including your income level and the country of residence.
Tax Deductions and Credits
The government often provides tax incentives to boost real estate investments. While direct investments in property may allow for deductions on mortgage interest and property taxes, the tax deductions and credits available for real estate stocks investors may differ.
For instance, the Tax Cuts and Jobs Act (TCJA) limited itemized deductions for state and local taxes to a maximum of $10,000.
If an investor’s combined state and local wage taxes and property taxes on their primary home exceed $10,000, they will not receive any additional tax benefit by way of itemized deductions for the property taxes of the new investment.
Tax Efficiency Strategies
Utilizing Tax-Deferred Accounts
Investors can enhance the tax efficiency of their real estate stocks investments by utilizing tax-deferred retirement accounts. This strategy can potentially defer the tax liability, thereby improving the overall returns on the investment.
Impact of Economic Changes
The tax landscape is also influenced by broader economic changes. For instance, the aftermath of the pandemic has led to a number of unusual and unpredicted trends that have ushered in a list of uncertainties as we head into 2023.
Best Real Estate Stocks to Invest In: REITs With Best Value
These REITs have the lowest 12-month trailing price-to-earnings (P/E) ratio. A low P/E ratio indicates that you’re paying less for every dollar of profit made because earnings can be distributed to shareholders in the form of dividends and share repurchases.
Annaly Capital Management Inc. (NYSE: NLY)
Annaly Capital invests in real estate and related assets, such as agency mortgage-backed securities (MBS), residential and commercial real estate, and middle-market lending.
For the third quarter ended Sept. 30, 2022 (Q3), the New York-based real estate investment trust company swung to a loss attributable to Annaly of about $275.3 million from earnings of $519.2 million in the same period a year ago. The company also declared a quarterly common stock cash dividend of $0.88 per share.
According to MarketWatch, Annaly has a market cap of $10.13 billion as of the time of writing.
Rithm Capital Corp. (NYSE: RITM)
Previously known as New Residential Investment Corp., Rithm Capital is a publicly traded REIT that makes investments in the residential housing market. Residential loans, non-agency securities, and other investments of a similar nature are included in the company’s portfolio of assets related to mortgage servicing.
Rithm reported GAAP net income of $124.5 million, or $0.26 per diluted common share in Q3. Meanwhile, revenue of the company for the same period hit $912.8 million. Rithm also declared a quarterly dividend of $0.25 per share.
The company’s current market cap is at $4.27 billion, as per MarketWatch.
Medical Properties Trust Inc. (NYSE: MPW)
Investing in, owning, and leasing medical and healthcare properties is what Medical Properties Trust does. Loans for mortgages are also offered by the business.
For Q3, Medical Properties reported net income attributable to its common stockholders of $221.8 million, up from $171.1 million a year prior. Revenue for the reported period stood at $352.3 million, a drop year over year from $390.8 million.
The company declared a regular quarterly dividend of $0.29 per share.
According to MarketWatch, Medical Properties has a market cap of $7.83 billion.
Best Real Estate Stocks to Invest In: Quickest Growing REITs
Realty Income Corp. (NYSE: O)
Real estate investment trust firm Realty Income owns and oversees commercial properties across the US and Europe. Its monthly dividends are fueled by cash flow from more than 11,400 commercial real estate properties owned under long-term agreements.
Realty Income reported earnings of $219.6 million for Q3, an increase from $135 million a year ago. Meanwhile, revenue came in at $837.27 billion, a 70.9% jump year over year from $489.89 billion.
As per MarketWatch, Realty Income’s market cap stands at $40.67 billion currently.
Howard Hughes Corp. (NYSE: HHC)
Howard Hughes Corp. is a real estate development and management company that owns, operates, and develops commercial, residential, and mixed-use properties all across the US. It concentrates on master-planned neighborhoods in places like New York, Maryland, Texas, and Nevada.
For Q3, Howard Hughes reported net income of $108.1 million which surged from $4.1 million in the year prior. Revenue for the same period jumped to $639.5 million year over year from $219.2 million.
The company’s market cap is at $3.48 billion, per MarketWatch.
Starwood Property Trust Inc. (NYSE: STWD)
Real estate investment trust company Starwood Property Trust offers mortgage-backed securities (MBS) and infrastructure debt investments management services. The business also buys commercial real estate assets.
The company in Q3 reported GAAP net income of $194.6 million and revenue of $390.5 million. It has a market cap of $6.58 billion, according to MarketWatch.
Diversifying Your Portfolio with Real Estate Stocks
Diversification is a strategy that helps in managing investment risk and can help generate a more consistent return over time. Investing in real estate stocks is one way to achieve diversification in your investment portfolio. Here are the various aspects related to diversifying your portfolio with real estate stocks:
Risk Management
Reduced Risk Exposure
Diversification through real estate stocks helps minimize the impact of adverse price movements in an individual asset or sector. By spreading investments across different assets and sectors, you’re less likely to experience the detrimental effects of a poor performance in any one area.
Consistent Returns Over Time
Over the long term, a diversified portfolio, which includes real estate stocks, can provide investors with more stable and consistent returns. Especially in the realm of commercial real estate investment, the tendency of real estate to appreciate over time can contribute to the stability of returns.
Historical Performance
Historical Outperformance
Historical data over the past 46 years indicates that a real estate blended portfolio outperformed a traditional portfolio. This showcases the potential benefits of including real estate stocks in a diversified investment strategy.
Income and Tax Advantages
Stable Income and Tax Benefits
Investing in real estate stocks can provide your portfolio with stable income through dividends and potential tax advantages, depending on the type of real estate investment.
Volatility Management
Decreased Volatility
Diversification, by including assets like real estate stocks that rise and fall at different times compared to other assets, can lead to reduced portfolio volatility.
This strategy can preserve capital in bear markets, which can then be deployed in bull markets to achieve decent portfolio returns.
Stability and Liquidity
Embracing Stability
Real estate is considered a more stable asset class as compared to others like stocks or bonds. Real estate stocks offer a way to embrace this stability in a portfolio, providing a buffer against market volatility and the cyclical nature of other investments.
Family offices and high net-worth investors often consider real estate a stable base, particularly in times of market uncertainty.
Trade-off Between Liquidity and Stability
Typically, real estate is seen as a less liquid investment compared to stocks or bonds. However, the reduced liquidity can lead to reduced portfolio volatility.
Investors trading liquidity for longevity could find real estate stocks an attractive diversification option to foster increased discipline in portfolio management.
Global Exposure
Real estate stocks also provide an avenue for global exposure, bringing in a level of geographical diversification that might be hard to achieve otherwise. This not only enhances diversification but also provides a broader perspective on real estate market trends across different regions.
Best Real Estate Stocks to Invest In: REITs With the Most Momentum
These are the REITs that had the highest total return over the past 12 months.
Omega Healthcare Investors Inc. (NYSE: OHI)
Real estate investment trust firm Omega Healthcare makes investments in the long-term healthcare sector, including facilities for assisted living, skilled nursing, and rehabilitation. A triple-net lease arrangement makes up the majority of the company’s assets.
The company reported adjusted funds from operations (AFFO) of $0.76 per share for Q3, down from $0.85 per share a year earlier. Revenue stood at $239.4 million, also down from a year ago at $281.7 million.
As per MarketWatch, the company’s market cap sits at $7.19 billion.
Iron Mountain Inc. (NYSE: IRM)
Information storage and management are Iron Mountain’s main priorities. It offers services including data centers, safe record keeping, as well as art storage.
The company reported Q3 AFFO per share of $0.98, up year over year from $0.90. Revenue stood at $1.29 billion, which increased from $1.13 billion a year ago.
Iron Mountain’s market cap is at $15.57 billion, MarketWatch says.
Host Hotels & Resorts Inc. (NASDAQ: HST)
80 upmarket and luxury hotels make up the portfolio of real estate investment trust company Host Hotels & Resorts, which also has five locations in Canada and Brazil. The company participates in joint ventures and collaborates with names like Hilton, Marriott, and Ritz-Carlton.
Host Hotels turned to net income of $116 million in Q3 from a loss of $120 million a year prior. Revenue jumped almost 50% year on year to $1.19 billion from $844 million. Meanwhile, adjusted FFO per diluted share rose to $0.38 from $0.20.
According to MarketWatch, the market cap of Host Hotels stands at $13.2 billion.
Best Real Estate Stocks to Invest In: REITS for Buy-and-Hold Investors
Agree Realty (NYSE: ADC)
With the exception of Alaska and Hawaii, Agree Realty is present in all states, and has fared better than others in this downturn in terms of holding onto its net-lease property portfolio, which has grown to over 1,600 properties.
Investment-grade tenants contribute to a share of the company’s revenue, with Walmart, Tractor Supply, Dollar General, and Best Buy.
The dividend distribution of Agree Realty is also increased on a monthly basis, and over the previous 10 years, it has increased by a compound yearly rate of 5.5%.
Additionally, despite upcoming adversity, the tenants of this retail REIT’s roster of companies that supply consumer items based on necessities should continue to pay rent and distribute dividends.
The company’s market cap is at $6.24 billion currently, per MarketWatch.
Digital Realty (NYSE: DLR)
Consumer goods are not a focus of Digital Realty; instead, it serves as a significant provider of digital storage and bandwidth to many of the biggest users of such services globally. In fact, companies like Verizon, LinkedIn, Google Cloud, and Amazon Web Services are among the top clients of this data center operator.
Also, Digital Realty is on sale as the firm’s stock price has fallen more than 40% so far this year as a result of both its connection to the tech industry and worries that significant customers may be shifting toward building their own data centers. But it should be good with a growing worldwide network of around 300 sites offering essential infrastructure to such a wide range of consumers.
Naturally, the liquidity of publicly traded REITs is a wonderful feature. You can invest in Digital Realty now and sell it at any time in the future while still benefiting from continuously increasing payouts from a firm that has increased its dividend for 17 years running.
Digital Realty has a market cap of $31.99 billion, MarketWatch says.
Prologis (NYSE: PLD)
San Francisco-based Prologis is one of the key benefactors and enablers of the rise in e-commerce that had been developing for more than a decade before skyrocketing following the pandemic. Its portfolio of logistics warehouse space totals around a billion square feet and is spread out over the globe.
Despite a record-low vacancy rate and swift rental hikes, worries about a slowdown in consumer spending and the expansion of one of its major clients’ own warehouse complex have contributed to a 38% decline in Prologis stock so far this year. The dividends paid by this industrial REIT have also increased for nine years in a row.
That momentum should continue amid the completion of Prologis’ acquisition of its next-largest competition, Duke Realty.
According to MarketWatch, the company’s market cap is at $109.92 billion.
All three are contenders for the best real estate stocks to think about purchasing due to their reliable dividends and potential for growth.
Global Outlook on Real Estate Stocks
The global scene of real estate stocks reflects a mosaic of opportunities and challenges. Different regions present varying dynamics, influenced by local economic conditions, regulatory frameworks, and real estate market maturity.
Current Economic Backdrop
The global outlook on real estate stocks in 2023 reveals a narrative of caution, with a glimmer of hope for stability and renewed investment activity as the year progresses. This caution stems from the uncertainty surrounding high inflation rates and rising interest rates witnessed over the past 12 months1.
However, as the year advances, a semblance of stability is expected, gradually igniting more vigorous investment activities in real estate stocks.
Inflation and Interest Rates
Senior property professionals express an optimistic outlook, anchored on the improving macro and monetary policy environment relative to capital markets.
They anticipate that inflation and base rates will peak in 2023, although the market will still grapple with elevated interest rates compared to the zero-percent years following the Global Financial Crisis (GFC).
The era of abundant liquidity, loose monetary policy, and cap-rate compression appears to be over, necessitating real estate to work harder for returns1.
Regional Dynamics
The dynamics of real estate stocks significantly diverge across emerging and developed markets. Emerging markets often present a fertile ground for real estate stocks, driven by rapid urbanization, growing middle-class population, and favorable demographic trends.
However, they also carry a higher level of risk due to political instability and less mature regulatory environments.
Developed Markets
In contrast, developed markets extend a more stable, albeit lower growth, environment for real estate stocks. Here, the real estate markets are well-regulated, and real estate stocks operate within a transparent and predictable framework.
For instance, in the U.S., Europe, and Asia-Pacific, the top cities for real estate investment in 2023 include Nashville, London, and Singapore, respectively, showing a diverse spectrum of investment landscapes.
Investment Sentiment and Sectoral Insights
The investment sentiment globally remains cautious, especially concerning new acquisitions. Major concerns include the availability and the cost of finance, pricing gap between buyers and sellers, and negative spread.
When delving into different asset classes, fundamentals for logistics and multifamilies remain solid, with cap rate expansions largely due to the higher cost of finance.
However, positive rental growth is expected to continue, offsetting the negative impact on the cap rate expansions to some extent. The retail sector enters the repricing cycle at a higher level this time, with some investors shifting their focus to retail assets, particularly in the Pacific and Japan.
The office sector faces the most substantial price adjustments, notably in the U.S. and Europe, with cap rate expansions expected to continue globally.
Best Real Estate Stocks to Invest In: Significant Parameters for REIT Analysis
Due to the specialized nature of their organization, REITs require investors to grasp certain measures. The funds from operations and adjusted funds from operations are two important indicators used to evaluate such securities.
FFO: This indicator adds and deducts specific factors from net income to calculate the cash flow generated by a company’s activities. Investors add depreciation and amortization expenses to net income and subtract gains from property sales to arrive at FFO.
FFO gives investors a more accurate picture of operational performance because real estate investments often increase in value over time as opposed to declining like many other assets.
AFFO: This indicator calculates the recurring/normalized FFO of a real estate corporation after capital maintenance costs have been subtracted. Since it takes into account the continuous costs of managing a real estate investment during its life, many experts believe that AFFO is a better metric than FFO.
AFFO is frequently used by investors to assess a company’s potential ability to continue paying dividends to stakeholders.
Technology and Real Estate Stocks
The blend of technology and real estate is stirring a transformation in the realm of real estate stocks.
This fusion, often encapsulated under the term PropTech (Property Technology), is all about leveraging modern tech tools to enhance the real estate sector’s efficiency, transparency, and accessibility, inevitably affecting real estate stocks positively.
Technological Advancements Leading the Charge
Proptech: Bridging the Tech-Real Estate Gap
Proptech, standing at the confluence of technology and real estate, embraces a myriad of applications designed to bolster the real estate industry. This ranges from virtual reality tours facilitating property viewing to blockchain technologies underpinning secure property transactions.
Proptech’s blossoming has been a significant boon for real estate firms, enabling them to enhance operational efficiency, which in turn, augments the value and appeal of real estate stocks.
Contech: The Construction Tech Evolution
Contech, or construction technology, has emerged as a savior in addressing some of the real estate industry’s longstanding issues like the affordable housing crisis.
By introducing online solutions, 3D printing, and robotics into the construction domain, Contech is helping to curb housing costs.
Notably, advanced construction techniques, such as modular building and energy innovations, are streamlining the construction process, reducing labor needs, and thereby lowering the cost of new homes.
This cost reduction is making homes more accessible to a broader demographic, which could resonate well with real estate stocks as more people can afford to invest in real estate.
Data Analytics and Artificial Intelligence (AI)
The leverage of data analytics and AI is empowering real estate firms to harness data for informed decision-making. This data-centric approach is enhancing the performance of real estate stocks by optimizing operations and refining investment strategies.
The Financial Influx in Proptech
The financial backing for proptech firms has been on an upward trajectory, despite a slight dip in 2022. The growth from $10 billion in 2017 to $32 billion in 2021 highlights the escalating importance of technology in real estate.
Venture capital firms, recognizing the potential, are channeling funds into proptech companies, a move that’s catalyzing innovation in real estate technology.
The projection that the real estate technology market will burgeon to $94.2 billion by 2030 underscores the substantial potential for technological solutions to address pressing issues in the real estate sector.
This financial influx is a testament to the growing confidence in technology’s capability to revamp the real estate sector, which bodes well for real estate stocks.
Global Real Estate’s Digital Transformation
The global real estate industry is amidst a colossal digital transformation, riding the wave of technological innovations. Over the last few years, technology’s role in real estate has pivoted from being insignificant to being a major game-changer.
This digital transformation is not only enhancing the operational efficiency of real estate firms but is also setting the stage for a potential upswing in real estate stocks.
Best Real Estate Stocks to Invest In: Bottom Line
Some investments are appropriate for beginners because they are straightforward. Other investments, on the other hand, could be trickier and only appropriate for seasoned investors.
The relationship between risk and profit depends on the type of investment. Before deciding where each percentage of your money will go, you need to be informed of the benefits and drawbacks of each option in order to choose the investments that would be appropriate for your portfolio.
You should do your homework, receive financial advice, and select what kinds of real estate stocks you want to invest in before making a final investment decision. Also, creating a checklist before choosing an investment is a good idea. In order to make better investment decisions, you can also consult with me. Let’s talk!
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
