- \n
- Business activity<\/li>\n<\/ul>\n\n\n\n
REITs generate their profits from renting and leasing their own real estate or land. The assets of a REIT consist mainly of real estate, land, shares in other REITs or even mortgages.<\/p>\n\n\n\n
- \n
- Tax benefits<\/li>\n<\/ul>\n\n\n\n
At the corporate level, REITs enjoy major tax advantages. For example, most REITs pay little to no tax on their corporate profits, as they must distribute most profits to shareholders. Private investors, however, have to pay taxes on dividends and capital gains after the final withholding tax! The tax advantage only applies at the corporate level.<\/p>\n\n\n\n
- \n
- High payout ratio<\/li>\n<\/ul>\n\n\n\n
Most REIT laws stipulate that profits must be distributed to shareholders at a rate of 90 %. For investors, the advantage of high payout ratios is a steady and predictable dividend inflow. Due to this legal regulation, many REITs have a high dividend yield.<\/p>\n\n\n\n
Are REITs sensible investments? <\/h2>\n\n\n\n
The Internet is full of stock and ETF analyses. The P\/E ratio, the payout ratio, the dividend yield and so on are analyzed. However, these approaches often forget one factor: risk.<\/p>\n\n\n\n
\"A higher return is always associated with more risk\" - according to classic capital market theory. That's why volatile speculation is often very popular with investors: \"The oil stocks are making the turnaround. I'll buy the 15 % dividend yield, they've been paying dividends for 50 years!\"<\/p>\n\n\n\n
For a long time, we thought the same way, until we analyzed our stocks according to return and risk and became aware of the risk paradox. Thus, we found that our stocks with lower volatility generated higher returns than stocks with higher volatility. The risk paradox was primarily discovered by the American finance professor Robert Haugen in the 1970s.<\/p>\n\n\n\n
With the Risk-return model <\/strong>stocks can be analyzed according to both performance and volatility over different time periods. This allows investors to create a portfolio from the optimal relationship between return and risk.<\/p>\n\n\n\n
Investors will find stocks with a high performance above the benchmark. Stocks with a lower return below it. Volatile stocks are on the right of the chart, while low-volatility companies are on the left.<\/p>\n\n\n\n
![\"A](\"https:\/\/www.captrader.com\/wp-content\/uploads\/2024\/03\/CapTrader_Reits_EN.jpeg\")
<\/figure>\n\n\n\nThe world's most important stock index, the S&P 500, divides the underlying stocks into eleven sectors of the S&P 500. These sectors can also be traded with ETFs. These are designated XLx, where the lowercase x stands for the \"abbreviation\" of the respective sector. For example, XLU means \"utility sector\" (utility stocks). Although there is now a REIT sector with the XLRE, but since this was only launched at the end of 2015, we use the VNQ ETF, a REIT ETF that already exists since 2005.<\/p>\n\n\n\n
- \n
- XLC - Telecommunications<\/li>\n\n\n\n
- XLY - Cyclical Consumer Goods<\/li>\n\n\n\n
- XLP - Non-cyclical consumer goods<\/li>\n\n\n\n
- XLE - Energy<\/li>\n\n\n\n
- XLV - Healthcare<\/li>\n<\/ul>\n\n\n\n
- \n
- XLI - Industry<\/li>\n\n\n\n
- XLB - Chemical & Packaging Industry<\/li>\n\n\n\n
- XLK - Technology<\/li>\n\n\n\n
- VNQ - Vanguard Real Estate ETF<\/li>\n\n\n\n
- SPY - S&P 500 ETF<\/li>\n<\/ul>\n\n\n\n
For the start date of the analysis, we have chosen January 01, 2007, in order to include the financial crisis of 2008\/09, as well as the Corona crash in 2020. Any dividend payments were reinvested in the calculation.<\/p>\n\n\n\n
![\"\"](\"https:\/\/www.captrader.com\/wp-content\/uploads\/2021\/06\/REIT-Sektor-im-Vergleich-zu-den-SP-500-Sektoren01-Jan-2007__30-Nov-2020-1024x683-1.png\")
<\/figure>\n\n\n\nWe have calculated the absolute return for each period under consideration, as well as the maximum drawdown that the price had during this period. The quotient of these two is the metric \"Quality\". A large return with a small drawdown results in a high quality value.<\/p>\n\n\n\n
![\"\"](\"https:\/\/www.captrader.com\/wp-content\/uploads\/2021\/06\/tabelle-1024x1003-1.png\")
*Calculation for Quality = Return in % \/ Max. Drawdown in % <\/figcaption><\/figure>\n\n\n\n The result of the analysis clearly shows that the REIT sector VNQ has a lower return with a higher fluctuation range and a higher maximum drawdown than the S&P 500 (SPY) itself. The Quality score shows a low value of 0.1 for the REIT sector (VNQ). Once again, the return value was calculated with dividends! The result does not speak for the REIT sector as a whole. With the exception of the energy and banking sectors, all other S&P 500 sectors outperform the REIT sector (VNQ) in terms of both return and maximum drawdown.<\/p>\n\n\n\n
Crisis analysis of REITs <\/h3>\n\n\n\n
Let's focus on the major stock market corrections again in more detail. In the following figures, the 2008\/09 financial crisis and the March 2020 Corona crisis are shown in our risk-return matrix:<\/p>\n\n\n\n
Financial crisis 2008\/09<\/p>\n\n\n\n
![\"\"](\"https:\/\/www.captrader.com\/wp-content\/uploads\/2021\/06\/REIT-Sektor-im-Vergleich-zu-den-SP-500-Sektoren11-Sep-2007__06-Mar-2009-1024x683-1.png\")
<\/figure>\n\n\n\nCorona crisis<\/p>\n\n\n\n
![\"\"](\"https:\/\/www.captrader.com\/wp-content\/uploads\/2021\/06\/REIT-Sektor-im-Vergleich-zu-den-SP-500-Sektoren20-Feb-2020__23-Mar-2020-1024x683-1.png\")
<\/figure>\n\n\n\nThe REITs sector ETF (VNQ), like banks (XLF) and energy stocks (XLE), is always among the crisis losers. REITs have very high volatility with an extremely high drawdown. Exactly the opposite of what a long-term investor usually wants. The sector in general is not attractive for long-term investors.<\/p>\n\n\n\n
Alternative Stock Picking? <\/h3>\n\n\n\n
The research results may come as a bit of a surprise to one or two dividend hunters. The fact is, the entire REIT industry is a classic underperformer compared to the simple S&P-500 (SPY). Nevertheless, as in any industry, there are some outperformers that have generated strong returns in recent years. Two examples of this:<\/p>\n\n\n\n
O - Realty Income Corporation<\/p>\n\n\n\n
DLR - Digital Realty Trust<\/p>\n\n\n\n
SPY - S&P 500 ETF<\/p>\n\n\n\n
VNQ - Vanguard Real Estate ETF<\/p>\n\n\n\n
![\"\"](\"https:\/\/www.captrader.com\/wp-content\/uploads\/2021\/06\/tabelle2.png\")
*Calculation for Quality = Return in % \/ Max. Drawdown in % <\/figcaption><\/figure>\n\n\n\n These REITs do not represent a trading recommendation. They are intended to illustrate that with the right stock picking, outperformance can also be generated in the REIT sector.<\/p>\n\n\n\n
Conclusion <\/h2>\n\n\n\n
The high distributions of REITs are tax-free and therefore interesting for all dividend hunters. Individual REITs were able to significantly outperform the S&P 500 in terms of both return and maximum drawdown. Examples are Realty Income (O) and Digital Realty Trust (DLR).<\/p>\n\n\n\n
Nevertheless, we have to take some of the enthusiasm away from many investors at this point. The VNQ REIT sector is performing significantly worse than the S&P 500 benchmark, both from a yield and volatility perspective. This calculation has been done under adjusted charts, meaning that dividend payments have been immediately reinvested. Since REITs often have a higher dividend yield than the S&P 500, taking into account the tax effect, the result would again be significantly worse for REITs, since the full amount of the dividend payment cannot be reinvested. In general, we do not want to invest in sectors that perform \"worse\" than the S&P 500 itself, otherwise we would be outperforming a simple benchmark ETF.<\/p>\n\n\n\n
Nonetheless, this is a blanket view, those who do stock picking in the REIT sector can earn additional returns. Some REITs have been able to outperform as described above.<\/p>\n\n\n\n
For us, the highest possible dividend flow is not the top priority. First and foremost, we want to achieve an increasing portfolio through price gains and dividends with the lowest possible volatility. This is only possible to a limited extent with REITs. For one thing, REITs are not classic outperformers, such as non-cyclical consumer stocks (XLP), and for another, most REITs have a high drawdown in times of crisis. Nevertheless, the purchase of individual top REITs can be a useful addition to a portfolio, but in our opinion they are not a basic investment for every portfolio.<\/p>\n\n\n\n
- High payout ratio<\/li>\n<\/ul>\n\n\n\n
- Tax benefits<\/li>\n<\/ul>\n\n\n\n