Will I still buy REITs paying 6% dividend yield? Are REITs still a good investment in 2025?

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Okay, I have been getting a lot of questions for my views on REITs as we head into 2025.

So I figured let’s tackle the issue spot on, in the first article I would be writing in 2025.

Are REITs still a good investment in 2025?

A blue chip REIT like CapitaLand Integrated Commercial Trust (CICT) or Frasers Centrepoint Trust (FCT) today pays anywhere from a 5.5% – 6% dividend yield.

If you’re comfortable with a smaller cap REIT, you can easily get a 7% dividend yield.

Versus a T-Bill or 10 year government bond that pays about 3% yield today.

You’re basically getting a 2.5% to 4% yield spread vs the risk free rate.

Does that make REITs a good buy?

How are REIT prices faring?

I’ve pulled up the chart of the Lion-Phillip S-REIT ETF below.

It’s interesting because you can see how REIT prices have been largely trading in a range the past 12 – 18 months.

When interest rates are high (like in late 2023 or mid 2024), REIT prices go down.

Then the market gets euphoric on rate cuts (like in early 2024 or Sep 2024), and REIT prices go up.

This actually opens up plenty of opportunities for swing traders to buy at the lower end of the range, and sell at the higher end of the range.

Or for long term investors, to buy at the lower end of the range.

I’m sure most of you will realise that REIT prices today are at the lower end of the range.

So… are REITs a good investment today?

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What is the bull case for REITs in 2025?

Let’s discuss both the bull and bear case for REITs.

The bull case, is broadly as follows:

  1. Lower Interest Rates will be a tailwind for REITs
  2. Higher rental rates
  3. High quality Real Estate can hedge inflation

Lower Interest Rates will be a tailwind for REITs

Unlike the past 24 months when the Feds were actively raising interest rates or keeping them there.

We’re now in a paradigm where the Feds are in rate cutting mode at least for the next one or two meetings, and then a pause after that.

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Which means that whereas previously the REITs were refinancing into a higher interest rate climate, we’re actually in a situation where REITs are refinancing into, at worst flat interest rates, at best lower interest rates.

This removes a great deal of the uncertainty that comes from a rate hike environment.

And allows the other 2 factors below to shine through.

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Higher rental rates for REITs

In 2022 I recall many of you asking whether rental increases for REITs will be sufficient to offset the impact of higher interest rates.

My answer was no, because when the Feds are hiking from 0% to 5.5%, you need (to put it bluntly) a massive increase in rental to offset that kind of interest rate increase.

That turned out to be perfectly true – and we saw declining DPU despite a rise in rental income.

But remember that today, the Feds are cutting interest rates.

If interest expense stays flat going forward, and rental income increases, that could actually lead to higher dividends.

And funnily enough, rental increases across the board have been very strong in 2024.

We’re seeing close to 10% rental increases for CICT across the retail and office portfolio.

In plain English, if financing cost for REITs stays flat (or goes lower), and rental income goes up, hey that could be pretty good news for REIT dividends.

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High Quality Real Estate can hedge inflation

As readers will know.

One of my bigger fears for 2025 (and beyond) is the resurgence of inflation.

With the Feds cutting, Trump likely to run a large budget deficit, and lots of protectionist / America first policies, you’ll be an idiot not to at least consider the possibility that inflation may return in 2025.

If we have a situation where inflation returns, yet the Feds are still flat and not hiking interest rates.

Real estate could be a decent hedge in that scenario.

Caveat of course is that if inflation returns, at some point the Feds may be forced into rate hikes and you want to be very careful with real estate when that happens (as real estate prices are very sensitive to interest rates).

But hey sometimes you cannot forecast every single scenario.

I could also well see a longer term situation where the Feds keep interest rates at current levels (but below inflation), to allow the US debt to slowly inflate away – and that scenario could be pretty bullish for REITs due to the rise in the underlying real estate prices due to inflation.

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What is the risk for REITs in 2025?

Interest rates go up due to higher inflation expectations

The risk of course, is what I talked about above.

That the market sniffs out the return of inflation.

Long term interest rates march up to 5% and beyond.

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And perhaps at some point the Feds start to talk about rate hikes instead of rate cuts.

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Let’s not mince words, that’s probably a nightmare scenario for REITs.

As a REIT investor in 2025, you at least have to be alive to the possibility of the above.

Will I still buy REITs in 2025? Are REITs still a good investment?

I think whichever way you spin it.

You have to realise this is a different paradigm from the 2010s.

Back then when cash was yielding 1% or less, REITs at 5.5% yield were worth their weight in gold.

REITs were able to borrow at ridiculously low interest rates, and the 5.5% dividend yield was highly attractive given the low interest rate climate.

Today when you can get 3% on cash risk free, and REITs are borrowing at a much higher interest rate, you have to accept that REITs at 5.5% dividend yield are a lot less attractive.

So nothing about REITs has changed, the problem is that the world has changed.

And when you think about REITs as an investment product today, you really need to think about it relative to other investments.

The way I see it.

If you’re a yield driven investor, I think the serious comparison for REITs will be investment grade bonds (SGD hedged).

If you’re a growth investor, I think the serious comparison for REITs will be stocks.

For a yield investor – Attractiveness of REITs vs Investment Grade Bonds yielding 5-6% (SGD Hedged)

Let’s say you’re a yield driven investor looking for 5 – 6% yield for moderate risk.

You can actually pick up US investment grade bonds, that are SGD hedged, with a 2 – 3 year average duration, that pays the same 5 – 6% yield.

Between that and REITs – which is the better investment?

I would say of the two, the bonds are probably lower risk if you diversify broadly and make sure you hedge the SGD FX risk.

The drawback is that the bonds have no real upside potential (unless you’re banking on sharply lower interest rates).

Whereas with REITs there is potential for upside (beyond just the yield) if you factor in the possibility or rental increases and rise in real estate prices.

So if you look at it this way, there is no free lunch in this world.

REITs are the higher risk product, with potential for higher upside.

Bonds are the lower risk product, without much potential for further upside beyond the yield.

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For a growth investor – Attractiveness of REITs vs Stocks

If you’re a growth investor on the other hand.

The comparison would be stocks.

For the more adventurous, stuff like commodities or crypto would be an option as well.

But let’s keep it simple and talk about stocks.

The universe of stocks is massive.

You can buy anything from US stocks like NVIDIA or Meta, to stock picking individual US semiconductor companies.

Or even something closer to home like DBS or OCBC.

You’re getting a broadly similar 5% dividend yield, with the potential for further dividend raises if interest rates stay high and earnings grow.

Are stocks a better buy vs REITs? 

Will I still buy REITs in 2025?

My take on this is fairly simple.

REITs at today’s prices, I like them a lot more than at Sep 2024 prices.

At Sep prices I thought they were a little pricey, after the recent decline I think most of them are close to fair value today (see my fair value target for individual REITs on FH Premium).

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But I do think you need to recognise that this is a different paradigm from the 2010s.

I don’t think this is like the 2010s when you just buy a basket of REITs and hold for 30 years into retirement.

I mean you can of course, but I don’t think you’ll see the same results as you did in the 2010s.

REITs as one investment in a diversified portfolio

I think REITs today are a decent yield investment, provided that you stick with high quality real estate in good locations, backed up by a good sponsor and strong balance sheet.

But investment grade bonds are a pretty decent investment today too, so there’s no need to be fixated on REITs for the yield part of the portfolio, and you can throw in some investment grade bonds or T-Bills as well.

And of course for growth, while REITs can perform that function.

I do think you want some exposure to stocks as well, as there are certain inflationary scenarios where REITs will not do well (where interest rates are high).

How do I invest in REITs today?

So generally speaking that’s how I’m seeing REITs today.

I think REITs are a decent investment, and I do have exposure.

At the right price, I would definitely be open to adding (see my price targets for REITs on FH Premium).

But REITs are not the only investment in my portfolio.

I would be mixing in bonds, US Stocks, Singapore stocks, crypto, commodities, cash products like T-Bills, and so on.

I think that’s just the geopolitical climate we’re living in today, where you do need a broadly diversified portfolio.

In any case, you can see my full investment portfolio, and the list of REITs/stocks I am keen to add, on FH Premium.
 

This post is written on 3 Jan 2025 and will not be updated going forward. My latest views on markets, my Stock watchlist and full Personal Portfolio, are shared on FH Premium.

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