Is Now the Time to Buy Real Estate Stocks?

Real estate stocks have been hit hard this year. Many high-growth real estate investment trusts (REITs) and tech stocks are down 10% to 40%, and some even more.

With skyrocketing inflation, rising interest rates, a cooling housing market, the stock market heading into bear market territory, and a possible recession looming, there is legitimate concern about whether this is a good time to invest in real estate stocks. .

While no one can really tell where prices or the economy is headed, here’s a closer look at the bull and bear cases for investing in real estate stocks today.

The Case Against Buying Real Estate Stock Right Now

If economic volatility continues on its current trajectory, there is a strong possibility that the economy will enter a recession. Recession periods are not always bad for the stock market or the real estate industry, but there are indicators that both markets could be affected in a recession.

Demand for real estate, particularly residential housing, is already failing. Lower demand for rental properties can lead to higher vacancy rates and lower rental rates, reducing business profits. Higher interest rates could also lead to higher borrowing costs, something REITs rely heavily on to finance their growth. These factors combined mean that real estate stock values ​​could fall in the near future.

However, there is no guarantee that prices will fall further. Many economic indicators remain positive today, including job growth and unemployment rates. And not all real estate industries are experiencing the same rate of slowdown. Industrial real estate, data centers and communications infrastructure, for example, are still experiencing robust demand and impressive year-over-year growth.

The Case for Buying Real Estate Stocks Right Now

REITs are required to pay 90% or more of taxable income as dividends, making them extremely reliable dividend payers. And since dividend yields and prices have an inverse relationship, the recent stock market crash makes this an excellent buying opportunity.

Some of the most popular and often premium priced stocks are on major sale right now. Foreword (PLD -0.77%)for example, it is the second largest REIT by market capitalization and the largest industrial operator in the world.

In recent years, the stock has traded for around 25 to 28 times its price to funds from operations (FFO), a metric that works similarly to stocks’ price-to-earnings (P/E) ratio. But with its stock price down 34% this year, it is now trading at 17 times its FFO and the company has had incredible earnings growth this year.

Long-term investors know that bear markets and recessions are part of investing. Values ​​may fall, but that doesn’t necessarily mean stocks’ ability to make money over the long term is any less valuable. Today’s prices definitely provide good buying opportunities, even if prices are going to fall further.

And that?

I remain very bullish on real estate stocks because today’s discounted prices will likely generate outperformance when sustained long-term. I’m young and I have time on my side, which means I can overcome any volatility that may be on the way.

This may not be the same for you. Investors nearing retirement or already retired may want to focus on stocks that pay more reliable dividends, such as National Commercial Properties, Real Estate IncomeY W. P. Carey on riskier real estate growth stocks.

I am practicing patience and will continue to invest in real estate companies with strong track records, healthy balance sheets, ample growth opportunities and stable performance.

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