Reasons to Include REITs in Retirement Portfolios

Whether your retirement is decades away or right around the corner, smart saving is necessary to ensure a comfortable transition into this chapter of life. Many self-directed IRA owners look to Real Estate Investment Trusts (REITs) as a way to accumulate the savings they need for a luxurious retirement, and here are some of the common reasons.

Commercial Real Estate Strong

While the strength of the U.S. economic recovery has decelerated during the first months of 2012, one sector that has been showing strength is commercial real estate, according to the National Association of Real Estate Investment Trusts (NAREIT).

Some subsectors of commercial real estate experienced dropping vacancy rates during the first half of the year, with apartment, warehouse, retail and office real estate all showing improvement.

REIT Performance

Data provided by the 2012 Research Magazine Guide to REIT Investing indicates that the FTSE NAREIT All Equity REITs Index, which comprises 128 companies worth more than $500 billion, surged 14.91 percent during the first six months of the year. This figure compares to the 9.49 percent return generated by the S&P 500.

In the second quarter of 2012, the REIT index rose four percent, while the S&P 500 dropped 2.75 percent. For the 12-month period through June 30, REITs yielded 12.48 percent, which is more than twice as much as the 5.45 percent generated by the benchmark S&P index.

Market Trends

Market trends are helping support the commercial real estate market. The supply and demand created by market participants is helping decrease vacancy and push rents higher. In addition, these variables are expected to positively impact the aforementioned fundamentals for the next several years.

Construction activity in commercial real estate declined to its lowest in 20 years during the most recent recession. While this activity has been slowly recovering, there is not much property that can be used for development. The economy continues to expand, however, creating a larger demand for high quality commercial real estate.

Diversification

There are a few basic draws of REITs that could motivate you to use them in your retirement portfolio. One major benefit of using REITs is to diversify your nest egg. Diversification is an important factor in generating consistent returns, and therefore increasing the savings held in your retirement account. REIT performance has been impressive throughout recent years, making them a popular choice among savers  Data provided in the 2012 Research Magazine Guide to REIT Investing indicates that during the 20-year period stretching from 1991 to 2011, these real estate trusts were 56 percent correlated with large-cap stocks.

Dividend Income

Many financial experts associate REITs with dividends. Equity REITs generate a steady stream of income primarily from tenants. Due to their corporate structure, they need to pay at least 90 percent of their taxable income in the form of dividends, creating more consistent returns for investors. The dividends paid by these real estate trusts have far surpassed those paid by the stocks contained in the S&P 500.

Inflation Protection

REITs can help you to manage the risks posed by inflation since the rents and values of commercial real estate tend to increase along with the general price level. These rising rents and values help support rising dividends over time. Data provided in the above report indicates that in 18 of the most recent 20 years, REIT dividends have risen more quickly than the Consumer Price Index.

 

REIT Performance

Over the last twenty years, the total returns generated by REITs have been higher than those of the S&P 500 Index, the Barclays U.S. Aggregate Bond Index and various other measures of stock and bond performance. These real estate trusts have also appreciated more quickly than inflation.