The Dow fell 832 points on Wednesday – marking it it’s 3rd worst day by points ever. The buzz surrounding this drop has been heavily focused on the Tech sector as this was their worst day in seven years, but how did your REITs do? What happened to your direct real estate holdings?
Wednesday the Dow was down 3%, the S&P 500 plummeted 3.3%, and NASDAQ dropped more than 4%, marking its worst decline since 2016.
In addition, the New Real Estate Sector SPDR Fund dropped 1.58% for the day and is down more than 10% for the month.
In a market where real estate values continue to climb nationwide, a quick look at how some of the “best” and largest REIT’s have performed certainly causes one to wonder what they may have gotten themselves in to. Let’s explore what has happened in the past month with RIETs and RIET ETFs a bit more.
Investopedia’s “The 5 Best Real Estate REIT ETFs of 2018”
- Vanguard Real Estate ETF
- Schwab U.S. REIT ETF
- iShares U.S. Real Estate ETF
- iShares Cohen & Steers REIT ETF
- SPDR Dow Jones REIT ETF
The 10 Largest REITs by Market Cap
- American Tower -- $61.8 billion market cap
- Simon Property Group -- $51.7 billion
- Crown Castle International -- $42.5 billion
- Public Storage -- $38.0 billion
- Prologis -- $34.1 billion
- Equinix -- $32.8 billion
- Weyerhaeuser -- $27.9 billion
- Equity Residential -- $23.7 billion
- AvalonBay Communities -- $23.3 billion
- Digital Realty Trust -- $22.2 billion
What does it mean for you?
What did this precipitous drop in values mean to those who hold real estate in their portfolio? That depends, how do you own it?
If you were in a public REIT, or even a private, non-traded REIT aspiring to be public in the near-term, your investment value likely dropped with the stock market. You ‘lost money’ - even though the real estate owned by the REIT may have gained value or may not have changed in value at all.
However, if owned your real estate directly, or through a Private Equity Fund structure like Caliber offers, the value of your real estate was likely unaffected. In fact, it may have increased in value, according to national and regional trends.
Why does it matter?
Because of the fundamental benefits informed investors seek to gain by owning real estate in the first place, which may be muted or denied to them in many REIT structures.
Let’s dig in.
There are several benefits to investing in real estate, including:
- Attractive Risk Adjusted Return on Investment
- Tax Advantaged Cash Flow
- Low Correlation to the Stock Market
- Historically Proven Hedge Against Inflation
- Fundamental Value Measures, Such as Replacement Cost
If an investment in ‘real estate’ does not offer all 5 of these key benefits is it really real estate? Is a car without a motor a car if it just sits there and can’t move? Not really.
In exchange for liquidity, the theoretical ability to buy or sell your investment whenever you choose, a REIT, which is truly a stock (derivative) that derives value by owning real estate typically eliminates benefit #2 and #3 and puts at risk benefits #1 and #5.
We say theoretical liquidity because, as proven during the 2008 financial crisis, many REIT investors found their ‘liquid’ REIT stock was not as liquid as it appeared. As with everything in the world of investment, liquidity depends on a healthy market of buyers and sellers and can seize up in times of crisis.
Putting it all together
The standard REIT typically,
A. Lowers your overall returns because of high fees. Non-traded REITs typically invest between .83 to .87 cents of every dollar you contribute. Once public, a second layer of fees kicks in and asset prices go up. Alternatively, Caliber aims to invest .95+ cents of every dollar.
B. Does not pass the tax breaks through to you – Caliber’s private equity real estate funds pass the tax savings through to you.
C. Have a share value that moves in conjunction with the broader stock market, potentially adding additional risk and volatility which may affect your investment’s value while the underlying assets may not have changed in value or may have changed in the opposite direction.
D. Have share value that may be decoupled from the underlying value of the assets, potentially disrupting your historically proven hedge to inflation.
E. Have a requirement to distribute 90% of their income to maintain their corporate status, causing your fund manager to send you small distribution checks when they clearly see a recession or turbulence on the horizon and should instead have the flexibility to build up substantial cash reserves to weather the storm – a lack of alignment for long-term value creation.
At Caliber, our unique Fund structures can help you gain access to all 5 of the fundamental benefits of real estate - and more.
If you would like to explore this topic further, qualify as an accredited investor, and are ready to remove stock market volatility from your real estate investments, call the team at Caliber, The Wealth Development Company, to explore our proven approach to grow your wealth.
Interested in learning more about Caliber? Hear our story.