While they may have some defensive qualities like other dividend stocks, the sector may not do as well as some people think, especially if property prices also start coming off.
Reits pay out distributions from collecting rental income and rely on both strong business activity in their specific real estate sectors and low operating costs to sustain distributions.
The rapid rate hikes have hit Reits particularly hard due to the much higher interest costs.
Past acquisitions were funded by cheap debt, so they will slow acquisition momentum.
Reits also face higher operating expenses for their portfolio assets due to inflation, so it is a double whammy. These may pressure some Reits to cut their distributions, especially those that did not adequately hedge their costs of borrowing to fixed rates or cannot improve their operational efficiency.
While physical real estate can potentially hedge against inflation when rents rise, similar to Reits, they will see higher interest and rents rarely keep pace with high inflation rates. Maintenance costs will also rise.
The Endowus Global Real Estate Portfolio – one of Endowus' satellite portfolios that make up a core-satellite strategy – is invested in diverse global real estate and infrastructure companies, offering an effective hedge against inflation.
It enjoys strong pricing power or even explicit long-term pricing contracts to pass the impact of rising prices to its customers.
Life stage matters
Individuals at different stages of life will have different financial priorities and goals.
Retirees may prioritise more stable payouts to supplement their retirement income.
But if you are part of the sandwich generation, you may be balancing more family expenditures while saving for retirement.
Investors in this life stage can look for a balanced portfolio of long-term fixed income holdings and dividend-paying counters, such as the Endowus Income Portfolios managed by some of the leading global fund managers.