REITs: A Peculiar Turn of Events

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Now, listen closely. For years, these things called Real Estate Investment Trusts – or REITs, as the grown-ups like to shorten it – have been trailing behind the rest of the market like a sad, little snail. The Vanguard Real Estate ETF (VNQ +1.31%), a rather bulky collection of property bits and bobs, has managed a measly 5.1% return over the last ten years. Compare that to the Vanguard Total Stock Market ETF (VTI 0.55%) – a positively boisterous 14.3%! It’s enough to make a REIT weep into its foundations.

But here’s the peculiar thing. It isn’t that these REITs are bad. Oh no. They’ve simply been hampered by a rather nasty combination of events – a bit like being stuck in a bog with a grumpy badger. Three particularly troublesome reasons explain this sorry state of affairs.

  • First, REITs are rather fond of low-interest rates. They thrive in them, like mushrooms in a damp forest. But for the last decade, interest rates have been doing a rather irritating dance upwards, twice, in fact! Even after the Federal Reserve had a little fiddle with the knobs, rates are still a hefty 350 ‘basis points’ higher than they were ten years ago. (Basis points, mind you, are a silly little invention for making numbers sound more complicated.)
  • Then came the Great Pandemic. A most unpleasant business. While some properties – warehouses and data centers, bless their sturdy hearts – carried on largely unscathed, others – malls, offices, hotels – were forced to close their doors and gather dust. It was a gloomy time for bricks and mortar, let me tell you.
  • And finally, the stock market has been having a rather exuberant party, fueled by these enormous ‘mega-cap tech’ companies – particularly those obsessed with ‘AI’. (Artificial Intelligence, which sounds suspiciously like something out of a science fiction story.) The market’s been doing so well, it’s almost vulgar.

Could the Tables Be Turning?

Now, I’m not suggesting these AI companies are about to tumble off their pedestals. They seem rather determined to stay there. But a great deal of their future growth is already priced in, like a ridiculously expensive sweet. Meanwhile, the average REIT trades for a mere 14 times its ‘funds from operations’ (FFO – the REIT equivalent of ‘earnings’. A rather clumsy term, if you ask me.)

Interest rates aren’t likely to plummet, of course. But most sensible people expect them to drift downwards gradually over the next few years. And that could be a game-changer for REITs. Lower rates make it cheaper for them to borrow money to grow, naturally. They also encourage money to flow out of boring, safe Treasury bonds and into dividend stocks, as investors search for a little excitement. And most importantly, the value of commercial property is rather dependent on interest rates – when rates fall, properties tend to become more valuable. It’s a simple bit of magic, really.

The bottom line is this: now might be an excellent time to consider investing in REITs. And if you’re looking for a broad slice of the real estate pie, the Vanguard Real Estate ETF – tracking around 150 REITs and offering a 2.8% dividend yield – could be a rather clever addition to your portfolio. Just don’t expect overnight miracles. These things take time, like growing a particularly stubborn pumpkin.

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2026-01-29 22:24