In 1970, Edwin Starr released his hit single “War! What is it good for?” a question to which he answered, “Absolutely nothing.” Therefore, it is no wonder that John F. Kennedy also advised that mankind should put a stop to war else war puts an end to mankind. Unfortunately, there is usually an opportunity even in chaos, and investors can take advantage of such rare opportunities to secure some wealth. It may seem like a lack of empathy, but time and tide wait for no man, and if you do not seize the opportunity, someone else will. For this reason, if you have diversified your portfolio with REITs, you must be wondering is war good for REITs? If it is, how can you benefit? Let’s take a look at how the real estate industry is affected by war.
Mortgage Interest Rates Effect on REITs
On March 10, 1991, The Seattle Times published the effect of war on real estate immediately after The Persian Gulf War, codenamed Desert Strom, was over. As per the article, the end of the war brought a lot of positive impacts, among which were the low mortgage rates and home prices. Buyers were so thrilled that mortgage lenders could barely keep up with the demand, and so were the real estate agents who experienced multiple bidders in an industry that had laid dormant for months. In Houston and Denver, home sales went up by 20%. Experts even advised people to take out loans or lock in their mortgage refinancing rates at the time because they would not be seeing such favorable terms any time soon.
In January 2020, the Realtor shared the same sentiments. Tensions rose after President Donald Trump killed Iraqi General Qassem Soleimani through a drone strike, saying that the general had been planning to attack Americans in the Middle East. Iraq planned to retaliate, causing the future to remain uncertain, and the real estate industry was affected. The Realtor explained that war would cause the mortgage interest rates to decline and affect home prices, but that would only depend on how severe it would be and how long it lasted.
The article further enlightened us that, given the uncertainty, investors would favor the bonds because they are much less volatile than stocks. It would result in a chain of reactions because mortgage rates would drop, and home sales would go up since more people can afford to buy a home. Those with a mortgage can also refinance high-cost mortgages. If this happened, that would mean people would rush to buy houses, meaning that occupancy rates for REITs properties would go up, resulting in more profits for the shareholders.
Other Industries Affected That Would Impact Real Estate
According to The Los Angeles Times, Doug Duncan of the Mortgage Bankers Association of America said that consumers become more conservative when war goes on for prolonged periods. They become more aware of their expenditure and reduce spending their money on large investments such as homes and cars. They reason that they have to save the little money they have left since the future seems bleak. Usually, war results in an economic recession as other industries are affected. For instance, oil prices increase, and that, in turn, leads to prices of goods going up since transport costs must be factored in the selling price. Consequently, consumers barely have anything left to even think of making a deposit on a home. As a result, REITs have to deal with poor occupancy rates, lower rent revenue, and reduced profit margins.
Even Trade Wars Have Their Effects
While we have been looking at physical war, Real Wealth Network informs us of the effects of trade wars. In 2018, for example, China had a chance to make a deal with the US on agricultural products, but it refused. President Donald Trump retaliated by imposing an additional 10% tariff on the goods not yet subject to tariffs. China did not back down and devalued the Yuan so that the dollar was much more valuable, meaning that importing goods from China was more affordable than exporting from the US.
For the real estate investors, such trade war clouds have their silver lining because the Chinese buyers have reduced as their government also instructed them to invest more at home than in the US. With reduced competition, house prices go down since there is less demand, and buyers can enjoy affordable housing. REITs can take that opportunity to buy more property.
On the other hand, such tariffs increase housing costs as remodeling and construction costs are affected. As a result, building affordable housing becomes costly, and luxury homes will be the only option. REITs would therefore have to look for tenants for such luxury homes, and at a time when tariffs are affecting every sector of the economy, it would be a challenge leading to lower occupancy rates.
REITs are Safe regardless of Trade Wars
Forbes sees it differently. The article explains that REITs are among the least sensitive stocks you can buy, and higher tariffs do not affect the dividends. In the short term, REITs investors can be guaranteed that the cash flows and dividends will not be affected negatively; instead, such high tariffs are advantageous.
Forbes informed us that by 2018, REITs were getting 90% of their revenue from existing assets. Therefore even when that trade war was happening, the high tariffs affecting construction cost would not affect the already built and owned property. The truth is that the high construction cost would impede further construction resulting in few houses being put up. Since housing demand would still be up compared to the slowed-down supply, properties' value would increase, enabling REITs to have increased occupancy rates and charge higher rent. However, not all REITs are at the winning end; industrial REITs are more at risk when trade wars result in higher tariffs. The good news is that regardless of the industry REITs have invested in, reducing the dividend payout to the shareholders is usually out of the question.
Written by Allen Lee
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