Real estate investment trusts (REITs) offer investors exposure to real estate without the sweat equity inherent through other means of investment like rental properties or property flipping. However, is investing in REITs still a viable opportunity for investors looking for alternative strategies?
“Real estate investment trusts have historically been able to diversify stocks and bonds while providing positive returns,” wrote Daniel Sotiroff of Morningstar. “They are also subject to legal constraints distinct from common stocks that dictate their sources of revenue and dividend payments. Those traits may lead some to classify REITs as an alternative investment. Yet, REITs are still subject to the same risks as other businesses, and they have become more closely integrated with the broader market. So, the diversification benefits they have provided in the past may not hold up in the future.”
Real Estate Exposure via ETFs
Investors who do want a piece of the real estate action can still do so through funds like the Vanguard Real Estate ETF (NYSEArca: VNQ). VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments.
Investors can also obtain commercial real estate exposure via the NETLease Corporate Real Estate ETF (NYSEArca: NETL). The NETL ETF is uniquely focused solely on Net Lease Real Estate Investment Trusts (REITs), which is one of the fastest growing sectors within the REIT space.
This pure-play Net Lease REIT ETF encompasses a variety of REITs that provide sustainable cash flows by leasing their properties through long-term contractual leases on a triple-net lease basis. The leases have terms that are generally 10 years or longer, predetermined rental rate increases, and minimal landlord responsibilities.
Climate Risks with Real Estate
The Urban Land Institute released a report outlining the climate risks associated with real estate investing–something that investors in the tangible asset class might not be aware of when assessing risk versus opportunity.
The reported cited Hurricanes Harvey and Maria in the United States and storms affecting northern and central Europe as prime case studies where the damage resulted in $135 billion paid out by insurers globally. However, $307 billion in actual damage from natural disasters affected the United States, according to the National Oceanic and Atmospheric Administration.
As far as its effects on value, the report noted that a 2018 study determined that homes that were left vulnerable to flooding in Florida, Georgia, North Carolina, South Carolina, and Virginia lost $7.4 billion in valuation between the years 2005 and 2017. In addition, the New York metropolitan area lost $6.7 billion in value of value in the same period because of increased flooding from sea-level rise.
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