According to JP Morgan Asset Management, REITs, or Real Estate Investment Trusts, have had an average return of 12% for the last 15 years, making them “the best-performing asset class in the market”. Following behind REITs in terms of average yearly returns are high-yield bonds (7.9%) and Large-cap U.S. Stocks (4.1%). REITs operate like mutual funds, however, they invest money in commercial real estate rather than stocks or similar assets. Because 90% of income must be paid out to shareholders as dividends, investors will see a good amount of return, especially with apartment/hotel properties where essentially the rent is what gets distributed to shareholders.
It is surprising that many fund managers neglected the potential of REITs when they were grouped under the same market sector as financial stocks. But the answer is volatility. According to Ken Brown, REITs are the second most volatile asset class, trailing behind emerging-market stocks. They are highly dependent on the market, meaning that when interest rates rise, REITs slow. This makes the analysis of a high-potential REIT difficult and risky to most fund managers.
REITs are a great source of steady income, but the recent and overwhelming amount of success REITs have experienced since the early-2000s will be slowing as interest rates rise. For the small-time investor looking to get a piece of the pie REITs are a great way to get involved; especially with industrial REITs as distribution/warehouse space will be needed to supply the increasing inventory that e-commerce generates.