In a version of MFS Investments' Periodic Chart of Investment Returns covering the years 2001 through 2020, real estate investment trusts (REITs) averaged a 9.71% annualized return, surpassing small and mid-cap equities.

Naturally, past performance is no guarantee of future success. Do retail investors and their financial advisors and clients stand to gain from putting money into real estate investment trusts (REITs)?

Real Estate Investment Trusts with Interest Rates

Due to the current low-interest rate environment, this is enticing to many investors. Rising interest rates are generally unfavorable for real estate investment trusts (REITs) since the increased cash outflows required to fund higher interest payments reduce the REIT's ability to payout dividends to its shareholders.

Rate hikes could significantly impact real estate investment trusts (REITs) carrying a high debt load or planning to refinance properties shortly. For example, doubts about when and if the Federal Reserve would raise interest rates have contributed to a 12 percent drop in the value of the Vanguard REIT ETF (VNQ) from its January 2015 peak.

Performance of REITs in the Past

Performance of REITs in the Past when Interest Rates Have Risen Cohen & Steers, an investment management firm that provides a range of REIT products, uses the Fed tightening cycle between June 2004 and June 2006 to illustrate the early effects of rising rates on the profitability of REITs. But as time passed, the thriving economy helped boost REITs' profits. The business reports that throughout this period, the four REITs had a cumulative return of 57.9%, while equities returned 15.5% and bonds returned 5.9%.

As the business puts it, "yield-driven corrections have generally presented excellent purchasing opportunities for long-term investors" when economic fundamentals are improving. Values are coming back down to earth as the benefits of quicker economic growth are factored in. We think that investors in a position to take advantage of these opportunities will be rewarded in the long run.

Real estate investment trusts (REITs) offer a more significant diversification benefit. Over the past decade, from 2010 to 2020, the S&P 500 Index and the NAREIT Equity REIT Index have shown a 70% correlation, indicating that REITs are not a great diversifier from stocks. However, a portfolio of 6 REITs can act as a fair diversifier, given they have low or negative correlations to core bonds, commodities, and currencies.

Macroeconomic and Stock Market Conditions

In addition to interest rates, the performance of real estate investment trusts (REITs) will be influenced by macroeconomic and stock market conditions. As the chief investment officer of CBRE Clarion Securities, which manages around $22 billion in real estate assets, Joseph Smith told CNBC: "The public's perspective on the economy and interest rates has changed. Consequently, market volatility increases, and REITs have a stronger tendency to correlate with the market as a whole during times of higher volatility."

According to Cohen & Steers, REITs will benefit from the worldwide economic recovery expected in 2022. (REITs). They believe that the REIT market, which "COVID upended in 2020," may be a "major beneficiary of a vaccination and a future economic revival."

Reasons Why Each Real Estate Investment Trust Is Unique

Like other mutual funds and ETFs, real estate investment trusts back these investments. To name a few types of REITs, we can include hotel & motel REITs, multifamily REITs, and commercial REITs. Investors may place their money in niche markets such as healthcare, forestry, or mortgage-related real estate investment trust (REIT).

To put it another way, the fortunes of the markets and industries to which these REITs are exposed will have a role in determining the success of these investments. This suggests that REIT performance exceeds the overall stock market and economy. That all real estate is local is a cliche; the situation here is not dissimilar.

The management team of a REIT is crucial to the success of the company. Like any other financial instrument, stocks need to be carefully managed to generate the best possible return. I want to know more about them and their history. Do stockholders constitute the company's top priority? Do they plan to invest some of their cash with yours?

Property investments gain from the Tax Cuts and Jobs Act of 2017. (TCJA). Several sections of the new tax code affect real estate investment trusts (REITs). As pass-through businesses, REITs benefit from the tax deduction of 20% of their revenue.