Why Investments In REIT Stocks Can Be Risky

Despite being backed by many positives, there is no shortage of negatives for the REITs. In fact, any hike in rate has the capability to trigger volatility in REIT stock prices. But weakness in the underlying asset categories of the REITs can dull their results. So, prior to investing in REIT stocks, one needs to pay a close attention to all the weaknesses and judge the stocks prudently.

Sector Weakness

Residential REITs have grabbed investors’ attention over the past few years. In fact, apartment demand has been high with favorable demographic growth in the millennial generation that has a high propensity to rent, rising household formation and elevated homeownership cost. But lately, things got worse for the residential REITs as increased supply in many of the markets raised an alarm.

These REITs witnessed a significant sell-off over the past few days following a guidance cut for 2016 same store revenue by Equity Residential (EQR) on Jun 1, citing continued weakness in New York and the recent downturn in the San Francisco portfolio. Equity Residential has blamed new rental apartment supply for hurting its rent growth. (Read: Equity Residential Lowers Guidance Amid Market Weakness)

Usually higher supply curtails the landlord’s ability to demand higher rents and leads to lesser absorption. Also, there is competition from the single-family housing market. These may keep the growth momentum of rent at check.

Moreover, recovery in the industrial market has continued for long. The CBRE Group Inc. CBG study revealed that the first-quarter 2016 decline in the availability rate marked the 24th consecutive quarter of decreasing availability. So chances of any striking decline in availability rates are less. Also, a whole lot of new construction is expected over the next two years that can put a pause on growth next year.

Further, retailers’ results in the last reported quarter were disappointing, with particularly, a number of traditional brick-and-mortar operators falling shy of estimates. Despite decent consumer spending trends and a number of retailers coming out with so-called omni- and multi-channel strategies, this outcome reflects the failure of retailers to come forward with an attractive alternative to online retailers. This has emerged as a pressing concern for retail REITs, as the trend is curtailing demand for the retail real estate space.

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