By Rebecca Lake
Source: U.S. News
Given the cyclical nature of the market, it’s unrealistic to expect the current bull market to continue its run forever. What’s uncertain is when the bear will dig in its claws.
Hindsight is 20/20 but foresight is just as important and the investments you make now could pay off once a bear market hits. With stocks treading the path of volatility and bond yields looking dismal in the current rate environment, real estate jumps to the forefront.
“Real estate exhibits low correlation with public markets and due to its fundamental value, is uniquely positioned to weather downturns,” says Omer Amsel, co-founder and chief operating officer at real estate equity crowdfunding platform StraightUp. “It’s not typically impacted by changes in market sentiment as quickly as equities,” representing an opportunity to “diversify, reduce overall volatility and create a stronger portfolio, offering downside protection among stocks, bonds and other assets.”
If bear market fears are on your radar, here’s what you need to know about investing in real estate now.
Rising rates, inflation could be a mixed bag. Following June’s increase of the federal funds rate, at least two more rate hikes are in the forecast for 2018. Rising rates have been accompanied by a moderate, yet steady, uptick in inflation.
“Rising interest rates will both help and hurt,” says Sean O’Hara, president of Pacer ETFs in Paoli, Pennsylvania. Rising rates mean the cost of borrowing increases, but inflation also means real estate values rise. “In the end, rising interest rates and inflation counterbalance each other.”
Jay Hatfield, portfolio manager of InfraCap’s REIT Preferred ETF (ticker: PFFR), says the biggest downside associated with rising interest rates for real estate investors is rising capitalization rates, which negatively impact valuations. When inflation rises at a similar pace, however, it can have a neutralizing or even positive effect “as the cost of replacing real estate will rise and rents are likely to be rising at an accelerating rate.”
The main concern for investors is how that carries over to returns. Viraj Patel, managing director and head of asset allocation at Fiduciary Trust Company International in New York, says total returns in real estate drill down to two factors: change in market value and net operating income. Rising rates may negatively effect market value, while having a positive effect on net operating income if it pushes more people toward renting.
How inflation affects the return outlook often depends on how quickly prices rise.
“Properties financed with fixed-rate debt and have rents that adjust periodically, like multifamily properties, can perform very well in an inflationary period,” says Dan Aronson, chartered financial analyst and managing partner of EPIQ Partners in Minneapolis. “Rents can climb faster than expenses, providing more income to the owners.” Rising rates could, however, put a damper on returns when it’s time to refinance.
Certain sectors may outperform in a bear market. If you’re considering real estate for a bear market – or in the worst-case scenario, a recession – sector choice matters.
“Sectors that should continue to do well even during a recession include data and infrastructure real estate, especially those connected to e-commerce,” O’Hara says. Industrial properties and health-care should also hold up well in a bear market economy.