09 Sep 2020
There has been a lot of debate over the years about whether stocks or real estate is a better investment for the long haul. That's because they've been running a tight race for decades, with one side pulling ahead at times only to give way to the other after a strong year. Because of that, it isn't easy to declare a true winner, especially in an ongoing race.
However, at this point, historical data does show a clear leader: real estate investment trusts (REITs). Here's a look at how the overall sector, its subsectors, and a few noteworthy REITs have performed versus the S&P 500 over the long term.
The U.S. Congress established REITs in 1960 to provide all investors with the same access to income-producing real estate that was once only available to wealthy individuals. The National Association of Real Estate Investment Trusts (NAREIT), which formed that same year, has been keeping track of historical return data for the REIT sector since 1972. It has developed several indexes to track returns, led by the FTSE NAREIT All Equity REIT Index. This index contains all 12 equity REIT subsectors (it excludes mortgage REITs, which aren't classified in the real estate sector but are instead considered financial companies).
Here's a look at how this index has performed versus the S&P 500 over the years:
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Self storage REITs stand out as they've beaten all other subgroups by a wide margin since 1994. These REITs also outperformed the market over the last 10 years (16.7% vs. 14.2% for the S&P 500). However, the group has lagged in more recent years (10.6% over the previous five years and 13.7% in 2019).
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Driving the subsector's strong results, especially more recently, has been the rise in e-commerce. With more people shopping online, industrial REITs, especially those focused on logistics properties, have expanded rapidly by developing new distribution centers to support this growth.
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The U.S. Congress created REITs to level the playing field so that all investors could access income-producing, wealth-creating real estate. That has turned out to be a boon for the average investor because REITs have outperformed stocks over the long term, with many subsectors and specific REITs delivering superior returns. Because of that, investors should find a place for REITs in their portfolio.
Author: Matthew DiLallo. Thumbnail: InvestorJunkie, and Aditya Vyas on Unsplash
