While the global property market may be experiencing an uncertain future, investing in REITs at the present time could prove to be a shrewd move. Not only do they offer a degree of diversity versus the wider stock market, they also provide a growing income return.
Furthermore, REITs could benefit from continued low interest rates. A loose monetary policy may encourage investment in the sector among yield-hungry investors, while also providing a stimulus to the property market.
As such, holding REITs within a portfolio could be a logical means of improving your financial outlook in order to get rich and retire early.
Property market outlook
While the growth in property values that was experienced over the last decade has come under pressure in recent quarters, the prospects for the property industry may be relatively positive.
The risks from a full-scale global trade war seem to be causing central banks across the world to adopt an increasingly cautious stance on monetary policy. The end result could be continued low interest rates. Historically, low interest rates have been a catalyst for the property market, since they make borrowing cheaper and encourage activity.
Furthermore, continued low interest rates may increase demand for REITs among income-seeking investors. Whereas in the past, assets such as bonds may have been held to generate a stable long-term income stream, investors may prefer REITs due to their higher income prospects at a time when bond yields may be suppressed by a loose monetary policy. Increasing demand for REITs may lead to increases in their valuations, which produces capital growth for their investors.
While REITs are listed on the stock market, they provide an investor with exposure to a variety of properties. While this may not be the same as owning properties directly, it does provide a degree of diversity in terms of asset allocation. This can reduce risk and lead to a more favourable risk/reward ratio over the long run.
Furthermore, REITs themselves are highly diversified. They could own, for example, a range of property types such as retail units, offices and residential units. This could further enhance the performance of an investor’s portfolio through gaining access to a variety of potential growth sectors over the long run.
With REITs offering a mix of income returns and capital growth potential, they could deliver significant total returns in the long run. Although the property market is cyclical, investors who are able to hold REITs for the long term could benefit from the impact of compounding. In other words, the reinvestment of dividends and the annual growth prospects for the property market could combine to offer increasingly attractive rewards over a period of many years.
Therefore, for investors who are seeking to generate an income, get rich and retire early, REITs could be a sound investment. They appear to offer a favourable risk/reward ratio that suggests they could have a positive impact on your financial future.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.