Insider Monkey

10 Cheap REITs with Huge Upside

Hamna Asim
9 min read

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In this article, we discuss 10 cheap REITs with huge upside. If you want to see more stocks in this selection, check out 5 Cheap REITs with Huge Upside. 

The most significant factor that affected REIT performance in 2022 was the sudden and significant rise in interest rates. This increase made it more costly for REITs to obtain new debt or refinance existing debt obligations, as well as making potential portfolio acquisitions more expensive. As a result of this dynamic, a vicious cycle was triggered, with rising financing costs leading to lower valuations for REITs, which then led to even higher financing costs. For years, the demand for housing has been exceeding its supply. With an increase in mortgage rates and high home prices, renting a home has become a more affordable option for many individuals and families. As a result of rising interest rates since the beginning of 2022, the monthly mortgage payments for a typical prospective homebuyer have increased by around 60%. Currently, the difference in affordability between buying and renting a home is historically significant.

According to Fidelity, real estate investment trusts (REITs) have had a challenging year in terms of performance, but there is a possibility of stabilization in 2023 if the rate at which interest rates increase slows down. With the current situation in the housing market, REITs that focus on renting out residential apartments and homes are expected to have the strongest performance.

As per Nareit, towards the end of 2022, the overall property fundamentals remained stable, but there were some indications of a decline heading into 2023. The industrial, retail, and apartment properties maintained their high occupancy rates, which were higher than their levels before the pandemic. On the other hand, office occupancy rates continued to decline, dropping by almost 3% from their average in 2019. The four-quarter rent growth rates were positive for the industrial, retail, and apartment sectors, but office sectors were striving to maintain positive rent gains. Due to high interest rates and debt costs, the volume of commercial real estate transactions has decreased. The combination of these factors resulted in a decline of REIT capital raising in the third quarter of 2022, and it has reached its lowest level since 2009.

Although it is commonly understood that past performance may not predict future results, examining the historical total returns of public and private real estate, as well as equity market total returns, before, during, and after economic recessions may provide insight into what we could anticipate in 2023 and beyond. It is worth noting that economic downturns do not necessarily lead to negative real estate performance. Additionally, REITs have typically been well-positioned to benefit from economic recoveries. Nariet's analysis of the last six recessions demonstrates that, on average, REITs underperformed private real estate in the four quarters preceding a recession, outperformed private real estate during a recession, outperformed private real estate in the four quarters following a recession, and outperformed their equity market counterparts before, during, and after recessions. 

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