Why REIT’s Are Not a Good Investment Today

Do REIT’s protect investors from inflation?

Some people think a strategy for hedging against the risk of inflation is to buy a REIT. My opinion is that inflation may not come for a long time and that it may take many years for the U.S. to get out of a Japan-style Soft Depression. Further, if inflation returns it would be an inflationary depression where people have less purchasing power in real terms and must cut back on purchases, including moving towards leasing smaller offices, smaller apartments, etc.

Employers could continue the process of moving jobs to low cost suburbs, using “hoteling” for employee office space and encouraging employees to work from home thus freeing up office space. It is a myth that real estate becomes scarce “because they are not making any more of it” because there are ways that office and residential tenants can save money by reducing consumption of square feet of real estate and the quality of their standard of living.

The search for higher yields than offered by bonds may have made investors overpay for REIT’s and thus REIT’s would not be a good investment.

What makes real estate go up is not inflation but rather it is a long period of low inflation and low interest rates coupled with rising income which increase demand for more and better quality real estate. Society has been experiencing a long history of shrinking or stagnant real income going back as far as 1998, so this is time for consumers to cut down on the consumption of real estate by moving into smaller leaseholds.

Assuming that inflation returns then interest rates will rise which will hurt the ability of people to buy real estate, thus making it go down.

What the future holds

My forecast is for a moderate deflation so that inflation won’t be a problem and instead investors will find they have panicked and overpaid for potential inflation hedges. Commodities, etc. will go down in price as they did when Lehman collapsed in 2008. It is important in investing to wait patiently to buy investments at a discounted price and to avoid overpaying for investments.

About the author

Don Martin, CFP®

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