Dutch pension services provider APG, one of the largest investors in real estate world wide, says the pandemic has not caused it to alter its strategy of focusing on investments that reflect technological change, demographic change, and sustainability.
APG uses a fully integrated strategy combining REITs and non-listed real estate to build and manage a portfolio of global real estate investments that offer a predictable dividend and grow in value over the long term. Return on investment is paramount for APG so that its pension fund clients and their members are assured an affordable pension, while also contributing to a more livable and sustainable world going forward.
Patrick Kanters, managing director of global private investments at APG Asset Management, spoke with REIT magazine on topics including APG's investment thesis, how it balances its portfolio, and the advantages of investing in REITs.
How does APG make allocation decisions regarding REITs versus private real estate?
For more than a decade, we have run a fully integrated strategy. That means that we don't really differentiate between listed and private assets in real estate. I would say 60% of our portfolio is in private real estate and the remaining 40% is listed real estate. Each time we select investments to build that portfolio's diversification with regard to regions, sectors, and risk styles, we always try to select the very best company or funds available.
For example, in Europe, there's very little available in the more alternative real estate assets, so that actually requires us to be more active in setting up these platforms ourselves, to work closely with the strong operators in that field.
In the U.S. however, there's a very wide variety of alternative listed asset classes to invest in such as senior housing, health care, life sciences and lab space, and others. In that case we might be more inclined to invest our money in REITs and complement these with private investments. It really depends on the markets, but having that integrated strategy allows us to think and choose from the full universe that is available to us.
What are some of the advantages of investing in REITs?
The simple answer is liquidity. REITs are more liquid so we can move in and out of them or give them a long-term focus over extended periods of time. And then of course there is the tremendous breadth of REITs available, although that depends on the market too.
The U.S REIT market has a very broad offering in all different sectors. The European REIT market is still going through a development phase where hopefully more alternative real estate sectors will be added to the investible universe.
We are long-term investors, so the true benefit of the liquidity isn't overly important to us, but it's an investment structure that we utilize. There are numerous great companies out there that provide us a focused exposure to varied sectors and other regions as well.
Are there ways you see the REIT industry needing to evolve?
I certainly think broadening REIT offerings to include alternative real estate sectors, a true integrated focus on newer sectors like technology solutions, would benefit their cause greatly.
For example, there are new technology solutions that will help in decarbonizing REIT portfolios, technology that will in turn help to run REIT portfolios more efficiently. I think many REITs will also need to have more people on board that aren't just knowledgeable about bricks and mortar but also knowledgeable about technological solutions and how to operate as best-in-class REITs.
Has the pandemic changed APG's investment thesis?
Interestingly enough, it hasn't really changed. I mean, a lot has happened with the pandemic but simply put, the key mega trends that we try to implement in our investments, that we try to capitalize on, have remained in place.
The pandemic has catapulted us five, six, seven years ahead of where we would have been. So, investing in the mega trends like technological change, demographic change, and sustainability have all remained by and large unchanged for us. We are going to keep investing according to these trends.
When we look at the market, we can see a clear polarization of returns from the investments that have been able to capitalize on these fast-moving trends. In short, those returns have been stellar. For the more traditional asset classes, it's not been as easy to capitalize on those mega trends.
Much of APG's investment thesis is based on sustainability. What is an example of a recent responsible investment in real estate APG has made that will produce solid returns for investors and also contribute to a more livable and sustainable world?
For every investment that we execute on, we always look first into the physical climate risk and also the transition climate risk. A very simple example is our timberland investments that we executed on this year in New Zealand and Chile. We bought numerous acres of timberland assets that meet the Forest Stewardship Council (FSC) certification. Adhering to the FSC's criteria means that these assets are managed to preserve biological diversity and benefit the lives of local people and workers.
These investments also qualify to meet the United Nation's Sustainable Development Goals (UN SDG). We've made numerous other investments that comply with FSC and UN SDG as well. We are taking long strides in sustainability, like setting up networks to recover waste heat from data centers for housing and offices, for example.
On some of our existing larger platforms we have been very active in engaging with the companies we invest in to make sure they improve their scoring on the GRESB real estate assessment. For every investment that we make, we actually require that the company fills in the GRESB survey that provides protocols that allow us a means to engage, to see where they can improve because ultimately, we want every real estate investment to be labeled as four- or five-star performers. In order to do that, those investments need to perform in the highest quintiles compared to the GRESB benchmark.
How has APG distributed its real estate investment allocations globally?
APG's real estate investment portfolio is composed of an approximately 40% exposure to Europe, 33% to the Americas, and 27% to Asia Pacific. We don't expect meaningful changes to the regional allocations as the current allocations fall well within the targeted bandwidth exposures set.
How have European REITs and real estate fared during the pandemic and what does the future hold with regard to REIT investments in Europe?
We've seen a kind of polarization of REIT investing in Europe. On the one hand, traditional asset classes such as hotels, traditional style retail, and office have stagnated, but we've seen mass inflows of investments into mega trend sectors like logistics and data centers. Residential rental property returns have also been exceptionally good.
Returns, by and large, are back or even above pre-COVID levels. As far as what the future holds, we think it will be very strong for those REIT investments that are able to capitalize on these mega trends. We continue to be big believers in logistics, in further expanding our exposure to affordable rental housing, but also to the many new sub-sectors.
We feel the trend will continue to move away from the more traditional sectors and more towards student housing, senior living, health care, and labs and life sciences buildings. There are other sub-sectors that are also being defined as alternatives that we think will be the core of REIT investing going forward in Europe.
With new trends surfacing post-pandemic, what sectors do you favor with regards to investment in European real estate?
Over the last six or seven years we have worked hard to establish ourselves in these newer alternative real estate sectors. At the same time, we also continue to build more exposure towards the affordable housing sector as there seems to be near-infinite rental housing demand. So, that's definitely an area we are heavily concentrating on for the future in Europe.
Outside of Europe and the U.S., what real estate markets and sectors are particularly attractive to APG?
Within Asia Pacific, key investment areas are Australia, mainland China, Hong Kong, India, Japan, Korea, and Singapore. We very much favor the same sectors in Asia Pacific as we do in Europe and the U.S., as these markets are expected to capitalize on the same mega trends. Also for Asia Pacific, we run a fully integrated investments strategy across listed and private investments.
Can you talk more about APG's natural resources real estate portfolio?
For APG and our clients, it's being treated as a separate asset class. In other words, it's not an integrated portfolio between natural resources and real estate. The natural resources asset class strategy is fully targeted towards forestry and agricultural land. As of today, we have around a billion plus Euros exposed to forestry and also a billion plus Euros exposed to agricultural lands in North and South America, Australia, New Zealand, and a minority invested in Eastern European lands.
Why are these types of direct investments so attractive to APG?
We have moved towards more direct investing because we're able to lower the total investment costs to our clients. We also have more influence and control in direct investing than we typically have in our private fund investments. We have ownership stakes of 10% on up to 40% and 50%, and that way we can be more influential in the course of the business and in controlling our own destiny. It also provides more control over managing our sustainability policies and ESG factors.
Summary. The REIT sector has endured declines in 6 of the first 8 months of 2022, including a -5.29% total return in August. Micro cap REITs (+6.9%) outperformed in August, while large caps (-5.17%), small caps (-6.65%) and mid caps (-7.51%) declined.Are REITs a good investment 2022? ›
Dividend-paying investments like REITs are particularly attractive because they can provide an additional source of income over time and increase an investor's overall returns.What are important metrics for REITs? ›
- General considerations when investing in a REIT. ...
- Quality and Track Record of Management, Portfolio & Financials. ...
- Aggregate Leverage (Gearing ) Level. ...
- Price to Net Asset Value (NAV) ...
- Tenant Mix. ...
- Occupancy Rate. ...
- Weighted Average Lease Expiry (WALE) ...
- Lease Expiry Profile.
REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.What REIT does Warren Buffett Own? ›
14. STORE Capital is the only REIT in the large equities portfolio of Berkshire Hathaway, the conglomerate run by the legendary investor Warren Buffett. Berkshire owns slightly less than 7 million shares of STORE, which accounts for just 0.1% of the portfolio.What happens to REITs when interest rates go up? ›
Thus, in order to grow, REITs need to raise external debt and equity capital from investors. As a result, higher interest rates increase a REIT's cost of debt and make it incrementally harder to achieve profitable growth.Can you become a millionaire with REITs? ›
For example, earning 11% annual total returns on a $300/month contribution would allow an investor to surpass $1 million after just 33 years. Setting aside $100 a month for each of these three real estate investment trusts (REITs) could make you a millionaire in the span of just over three decades.What is the most successful REIT? ›
Best-performing REIT stocks: October 2022
Bluerock Residential Growth REIT, Inc. First Real Estate Investment Trust of New Jersey, Inc. InvenTrust Properties Corp. LTC Properties, Inc.
- Claros Mortgage Trust Inc. (CMTG)
- Digital Realty Trust Inc. (DLR)
- Rayonier Inc. (RYN)
- Sabra Health Care REIT Inc. (SBRA)
- Stag Industrial Inc. (STAG)
- Ventas Inc. (VTR)
- Vici Properties Inc. (VICI)
- Vornado Realty Trust (VNO)
- Equity REITs. Most REITs are equity REITs, which own and manage income-producing real estate. ...
- Mortgage REITs. ...
- Hybrid REITs.
- Economic outlook. Like stocks, the state of the economy is an important factor affecting the performance of Reits. ...
- Yield and frequency of payouts. ...
- Interest rate environment. ...
- Weighted average lease expiry (WALE) ...
- Net Asset Value (NAV) ...
- Funds from operations (FFO)
Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.Are REITs better than buying real estate? ›
Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.Should you buy REITs during inflation? ›
REITs tend to outperform in the high inflation periods, with strong income returns offsetting falling REIT prices. On average, REITs outperformed the S&P 500 by 5.6 percentage points during these periods.What REIT pays the highest dividend? ›
|Company||Current Price||Dividend Yield|
|ARR ARMOUR Residential REIT||$5.40 +4.4%||22.22%|
|IVR Invesco Mortgage Capital||$11.92 +4.2%||21.81%|
|NLY Annaly Capital Management||$18.22 +3.5%||19.32%|
|TWO Two Harbors Investment||$14.27 +6.0%||19.06%|
The five largest REITs in the United States in 2021 are: American Tower Corporation, Prologis, Crown Castle International, Simon Property Group and Weyerhaeuser.
- Vanguard Real Estate ETF (ticker: VNQ) ...
- Schwab U.S. REIT ETF (SCHH) ...
- Real Estate Select Sector SPDR Fund (XLRE) ...
- Vanguard Global ex-U.S. Real Estate ETF (VNQI) ...
- Pacer Benchmark Data & Infrastructure Real Estate Sector ETF (SRVR) ...
- iShares Mortgage Real Estate Capped ETF (REM)
FCPT, headquartered in Mill Valley, CA, is a real estate investment trust primarily engaged in the acquisition and leasing of restaurant properties.
Key Points. Buying high-quality discounted REITs today could lead to superior pricing and returns in the future. For those with patience, now looks like a good time to invest . However, not all REITs are a value buy right now and some investors should take caution.Are REITs safer than stocks? ›
Risks of Publicly Traded REITs
Publicly traded REITs offer investors a way to add real estate to an investment portfolio and earn an attractive dividend. Publicly traded REITs are a safer play than their non-exchange counterparts, but there are still risks.
In general, a good rule of thumb is that REITs should not make up more than 25% of a well-diversified dividend stock portfolio, depending on your individual goals (such as what portfolio yield and long-term dividend growth rate you're targeting, and how much volatility you can stomach).How do you get passive income from REITs? ›
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.Are REITs a smart investment? ›
In contrast, REITs probably aren't a good investment if you're investing for the short-term since liquidity can be low. Additionally, since REITs must pay out at least 90% of income as dividends to shareholders, they don't typically have as much growth potential as growth stocks.Is REIT good for passive income? ›
Generate income with its high dividend yield: With their high yields that typically range from 4% to 8%, REITs are an appealing buy for investors looking for passive income. REITs have such high yields because they distribute at least 90% of their taxable income each year.What is better than REITs? ›
Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.What type of REIT is the safest? ›
These REITs offer investors rock-solid income streams.
Most REITs pay above-average dividends backed by steady rental income. However, some REIT dividends are safer than others. Three of the safest in the sector are those paid by Prologis (PLD -0.36%), Camden Properties Trust (CPT 1.29%), and Realty Income (O 2.24%).
Like all equities, they carry a measure of risk that is much greater than government bonds. REITs can also produce negative total returns during times when interest rates are high or rising.What is the biggest REIT in the world? ›
|1||Prologis 1PLD||$99.34 B|
|2||American Tower 2AMT||$94.94 B|
|3||Crown Castle 3CCI||$56.31 B|
|4||Equinix 4EQIX||$55.65 B|
Both REITs and stocks can provide a steady stream of income for investors, but REITs focus more on that aspect than stocks do. REIT investors receive income from the revenue that the commercial properties in the REIT produce, such as through rent or lease payments.What is the most common REIT? ›
The two main types of REITs are equity REITs and mortgage REITs, commonly known as mREITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. mREITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.
It is like a debt product because of having to mandatorily distribute 90 percent of its net distributable income. And it is like equity because it is listed/tradeable on the exchanges and its price depends on demand-supply, market's perception, etc. So, it's a play on both regular income and capital appreciation.How does REIT impact the real estate industry? ›
Typically, REITs offer investors an opportunity to possess high-priced real estate and enable them to earn dividend income to boost their capital eventually. This way, investors can utilise the opportunity to appreciate their capital and generate income at the same time.How a REIT makes money? ›
REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with steady income and, if held long-term, growth that reflects the appreciation of the property it owns.How do you tell if a REIT is overvalued? ›
If a REIT's dividend yield is above its long-term average, then the trust is undervalued; conversely, if a REIT's dividend yield is below its long-term average, the trust is overvalued.What causes REIT to rise? ›
If rising rates reflect strong economic growth, the expected returns to REIT investments might also be good. This could reflect stronger demand as well as the likelihood of a falling risk premium, which causes valuations—for example, price-to-earnings ratios—to rise.Why are REITs declining? ›
REITs are down heavily in the recent past. They have dropped mainly due to rising interest rates, and the Federal Reserve has made it clear that they expect to hike rates again in the near term, according to Seeking Alpha Author Jussi Askola. It may seem as if REITs are likely to drop a lot more in the near term.What is the downside of REITs? ›
REITs also have some drawbacks, including: Sensitive to Demand for Other High-Yield Assets. Generally, rising interest rates could make Treasury securities more attractive, drawing funds away from REITs and lowering their share prices. Property Taxes.What is the average return on a REIT? ›
What REIT subsectors have done the best at outperforming stocks?
|REIT subgroup||Average annual total return (1994-2019)|
REITs: Historically A Great Source Of Safe Income In Recessions. Outside of the Great Recession, when high leverage and an imploding credit market caused most real estate investment trusts ("REITs") to cut their dividends, REITs tend to be a great way to enjoy safe and growing income in all economic conditions.Do you pay more taxes on REIT dividends? ›
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
3 High-Dividend REITs to Buy Now
- Over-leveraged. ...
- High payout ratio. ...
- Declining revenue.
There's only one catch: the payouts are not generated from the company's earnings. This largely explains why so many REITs have low payout ratios. In equity research, the payout ratio is the percentage of net income that a company pays out as dividends.Are REITs a good buy now? ›
REITs perform well late in the cycle and offer a lot of options to select markets and tenants. The focus must be on the income benefits, not the portfolio value, which will have to fall with rising rates.Are REITs doing well right now? ›
Many REITs have excellent track records of steadily increasing their dividends. For example, Federal Realty Investment Trust delivered its 53rd consecutive annual dividend increase in 2021, the longest in the REIT industry. Many other REITs have lengthy streaks of increasing their dividends at least once each year.Are REITs a good investment if the market crashes? ›
If you're interested in investing in real estate but need a degree of liquidity, check out real estate investment trusts (REITs). Because they invest in real estate, REIT performance may be less correlated to the stock market, making them a good hedge against crashes.Are REITs a good investment for the future? ›
In contrast, REITs probably aren't a good investment if you're investing for the short-term since liquidity can be low. Additionally, since REITs must pay out at least 90% of income as dividends to shareholders, they don't typically have as much growth potential as growth stocks.What is the 2% rule in real estate? ›
The 2% rule states that the monthly rent for an investment property should be equal to or no less than 2% of the purchase price. Here's an example of the 2% rule for a home with the purchase price of $150,000: $150,000 x 0.02 = $3,000.Why REITs are dropping? ›
A key reason why REIT prices are plunging is because of a sharp increase in interest rates. The US Federal Reserve has hiked its policy rate by 0.75 percentage points over three consecutive sessions, taking the benchmark rate to a range of between 3% to 3.25%.Why all REITs are falling? ›
The Fed's continued aggressiveness in raising interest rates and growing fears of a recession took a toll on publicly-traded real estate equities. The Fed's continued aggressive moves on interest rates and prospects of a recession have taken their toll.Which REIT is the safest? ›
These REITs offer investors rock-solid income streams.
Three of the safest in the sector are those paid by Prologis (PLD -0.36%), Camden Properties Trust (CPT 1.29%), and Realty Income (O 2.24%).
REITs Are The Easiest, And Usually The Best, Way To Invest In Real Estate. While commercial real estate is where many of the world's millionaires and billionaires come from, you don't have to be a professional real estate developer to get rich from this sector.Why I quit buying rental properties to buy REITs instead? ›
REITs generate higher returns than rental properties in most cases. They are also safer and require little effort. Especially today, it makes sense to favor REITs since they are priced at huge discounts relative to the value of the real estate they own.Why REITs are better than real estate? ›
Pros of REITs
They offer a low-cost way to invest in the real estate market. You can invest in a fund with as little as $500—a much lower entry point than direct real estate investing. Another benefit is that REITs offer enticing total return potential.
- Vanguard Real Estate ETF (VNQ)
- Schwab U.S. REIT ETF (SCHH)
- Real Estate Select Sector SPDR Fund (XLRE)
- Vanguard Global ex-U.S. Real Estate ETF (VNQI)
- Pacer Benchmark Data & Infrastructure Real Estate Sector ETF (SRVR)
- iShares Mortgage Real Estate Capped ETF (REM)
While stocks traditionally have the highest potential for reward over time, they're also the riskiest, and as stock markets plummet around the world, we can see that high risk investments aren't necessarily the best way to get higher returns. So for long term investments, REITs win.