Are REITs still overvalued, as they were in 2013?

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Are REITs still overvalued, as they were in 2013?

Yes
14
16%
No
19
22%
Don't know
55
63%
 
Total votes: 88

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InvestorNewb
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Are REITs still overvalued, as they were in 2013?

Post by InvestorNewb »

Hello,

In 2013, there were countless posts advising investors to stay out of US REITs, including some from authorities in the space.

We are still very early in the year, but VNQ has already seen a 7% gain. I know it can drop just as easily, but I am curious to know if anyone has a change in opinion about US REITs and the general advice that seemed to be given last year.

Has the dark cloud passed for this asset class? It will be interesting to come back to this thread in a year or two from now...
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
John3754
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Re: Are REITs still overvalued, as they were in 2013?

Post by John3754 »

If someone felt that an asset class was overvalued, why would they change their opinion after said asset class had a 7% gain?
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Re: Are REITs still overvalued, as they were in 2013?

Post by InvestorNewb »

John3754 wrote:If someone felt that an asset class was overvalued, why would they change their opinion after said asset class had a 7% gain?
Maybe they would come to the realization that their opinion was wrong. There is some number that would change the opinion, but it's different for everyone.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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midareff
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Re: Are REITs still overvalued, as they were in 2013?

Post by midareff »

Who cares... 7.5% of total is just that.
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Re: Are REITs still overvalued, as they were in 2013?

Post by surfstar »

You should short REITs and go 110% into EM.
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Re: Are REITs still overvalued, as they were in 2013?

Post by John3754 »

What does your IPS say you should do regarding REITs?
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Random Musings
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Re: Are REITs still overvalued, as they were in 2013?

Post by Random Musings »

InvestorNewb,

In another thread you said this:
Threads like these are a reminder why it's a good idea to simply buy and hold.

Since the start of this thread, Aug 08, 2011, the Total US Stock Market is up 61.67%.
Stay reminded and quit the rope a dope stuff.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
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Re: Are REITs still overvalued, as they were in 2013?

Post by grap0013 »

What does that old thread say for price/cash flow ratios?

Here are the current ratios:

VNQ (US REITs)
P/CF = 14.03

VNQI (International REITS)
P/CF = 8.30

Put very simply, US REITs are ~70% overvalued in relation to international REITs.

I think historic P/CF ratios for US REITs are somewhere in the 6-8 range. US REITs may be up 7% this year, but current valuations indicate much lower predicted returns going forward for some time.
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

We invest in both the US and International Vanguard REIT funds and plan to stay the course.

The US REIT fund is having a nice YTD (the year is early and over the long term it does not matter) in relation to Total Stock Market.

I prefer to invest in asset classes.
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Re: Are REITs still overvalued, as they were in 2013?

Post by LAlearning »

I hope another dark cloud comes soon....so I can buy the shares you sell.
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

LAlearning wrote:I hope another dark cloud comes soon....so I can buy the shares you sell.
I agree. I enjoy a sell off in REITs to buy more shares.
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Re: Are REITs still overvalued, as they were in 2013?

Post by swaption »

I'd say go back to those posts, take a look at the rationale used by those that we opining on REIT valuations, and then apply said rationale to the current market. Absent such a process, opinions are just opinions, and your left grasping at straws to determine who to pay attention to.
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Re: Are REITs still overvalued, as they were in 2013?

Post by Ice-9 »

For much of 2013, my REIT allocation was below target, so I was sending a good bit of my biweekly purchases toward that index fund.

So far in 2014, my REIT allocation has not been below target, so I have not been sending my biweekly purchases toward that index fund.

I answered "Don't know" in the poll, but if my rebalancing spreadsheet has any valuation-determining powers, then REITs are currently about as fairly valued as I could expect an asset class to be. (I don't think my rebalancing spreadsheet has such powers, but who knows?)
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Re: Are REITs still overvalued, as they were in 2013?

Post by jdilla1107 »

InvestorNewb wrote: It will be interesting to come back to this thread in a year or two from now...
It really won't though. I can already tell you the results, because I can see into the future. Here goes... The people who guessed right will feel smart, the people who were wrong won't come back, and the smart ones won't be paying attention to any of it.
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Re: Are REITs still overvalued, as they were in 2013?

Post by hiddensee »

InvestorNewb wrote:
John3754 wrote:If someone felt that an asset class was overvalued, why would they change their opinion after said asset class had a 7% gain?
Maybe they would come to the realization that their opinion was wrong. There is some number that would change the opinion, but it's different for everyone.
Do you believe that, if the price of oranges were to rise 1,000%, this would be strong evidence that oranges were always worth $20 each, and probably even more? This is a dangerous mindset.
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Re: Are REITs still overvalued, as they were in 2013?

Post by grap0013 »

jdilla1107 wrote:It really won't though. I can already tell you the results, because I can see into the future. Here goes... The people who guessed right will feel smart, the people who were wrong won't come back, and the smart ones won't be paying attention to any of it.
+1

Well said.
There are no guarantees, only probabilities.
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Re: Are REITs still overvalued, as they were in 2013?

Post by tibbitts »

Yes, in every recent year, including 2014, authorities in domestic and foreign equities, REITs, bonds, commodities, and even cash(!), have more or less agreed that all have been overvalued.
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Re: Are REITs still overvalued, as they were in 2013?

Post by ML 59 »

2013 is only one year. We are less than 2 months into ’14.

‘Newb, I’m not sure if you are serious with these threads or not. If you are serious, then I suggest looking beyond the short term; read, study, and learn. Only then, decide a long-term asset mix that is right for InvestorNewb. Polls won’t get you there - if you don’t understand why (or why not) to add an asset class. Valuations may or may not be the only or final determinant.

There are a number of excellent books recommended in the wiki. Not all of the authors agree on every detail, but maybe, like I found, one author will resonate with your thoughts and thinking process. If the advice is sound and reasonable, then stick to that author and forget about polling the others.

Unless you timeline for this account is short – look at a longer term investment strategy.

...I'll get this round... :sharebeer
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

International REITs are down this year. US REITs are having a nice year thus far compared to Total Stock Market.

Has anyone been investing in the International REIT fund for additional diversification?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Are REITs still overvalued, as they were in 2013?

Post by Tamahome »

I believe they are still over-valued. Therefore, I will continue to purchase exactly as much as my written investment plan states. That way, when they are undervalued, I will be able to purchase exactly as much as my written investment plan states. Since some assets may be undervalued, I am buying exactly the amount indicated in my written investment plan. Why? My written investment plan was designed with the idea in mind that sometimes some assets will be overvalued, and sometimes they will be undervalued. As they will act in different ways at different times, my plan allows me to protect myself from myself.

If you are deciding whether or not to jump in, do it. Even though I think they are overvalued, I plan on purchasing the amount needed. It turns out, I am often wrong about what the market considers to be over or undervalued.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: Are REITs still overvalued, as they were in 2013?

Post by Tom_T »

The Vanguard REIT fund had a negative total return in Q2, Q3, and Q4 2013. If REITs are overvalued, they are still at better prices than a year ago.
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Re: Are REITs still overvalued, as they were in 2013?

Post by grap0013 »

abuss368 wrote:International REITs are down this year. US REITs are having a nice year thus far compared to Total Stock Market.

Has anyone been investing in the International REIT fund for additional diversification?
Abuss,

You are a REIT junky, have you added more international REIT? Just curious.

I get enough from all my SCV exposure, but if I did have them, I'd go 50:50 US REIT:international REIT.
There are no guarantees, only probabilities.
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

grap0013 wrote:
abuss368 wrote:International REITs are down this year. US REITs are having a nice year thus far compared to Total Stock Market.

Has anyone been investing in the International REIT fund for additional diversification?
Abuss,

You are a REIT junky, have you added more international REIT? Just curious.

I get enough from all my SCV exposure, but if I did have them, I'd go 50:50 US REIT:international REIT.
A REIT junkie? That was actually good.

I added International REITS almost a year ago. They seem to zig when others zag. I split our REITs 60% US and 40% International.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Are REITs still overvalued, as they were in 2013?

Post by nedsaid »

I have read persuasive posts from Larry Swedroe, Dr. Bernstein, Garland Whizzer, and others that REITs were overpriced. I agreed with them. But I have not made any changes to my investment portfolio as a result. One reason was the warning that REITs would return "only" 2% above inflation. Well, a 2% real return looks pretty good to me in a low interest environment.

I opined that I didn't have the enthusiasm for REITs that I used to given the valuations. So I wouldn't bet the ranch on these things right now. But as part of a diversified portfolio, I am still okay with these. The case for REITs in a portfolio isn't as strong as it once was. But I have noticed that the yields have crept back over 4% and the valuations look a little better. If I had to rate these as "buy", "sell", or "hold"; I would be in the "hold" camp.
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Re: Are REITs still overvalued, as they were in 2013?

Post by InvestorNewb »

Here is what keeps me ambitious about REITs:

Portfolio 1 = Total US Stock Mkt
Portfolio 2 = Intl Stock Market
Portfolio 3 = REITs


Image

Image

Source: http://www.portfoliovisualizer.com

They appear to be a superior asset class if you look at historical returns. This is why I don't mind having a higher allocation to them (15-20%).
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Are REITs still overvalued, as they were in 2013?

Post by John3754 »

InvestorNewb wrote:They appear to be a superior asset class if you look at historical returns. This is why I don't mind having a higher allocation to them (15-20%).
Performance chasing is a poor strategy.
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Re: Are REITs still overvalued, as they were in 2013?

Post by InvestorNewb »

John3754 wrote:Performance chasing is a poor strategy.
I don't consider a long-term plan performance chasing. Everyone looks at how their funds have fared in the past; it's part of devising a good plan.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Are REITs still overvalued, as they were in 2013?

Post by lloydbraun »

Well to an extent we all use past performance in assuming/hoping that over the course of 30-40 years the total market will increase enough over inflation to yield solid real profits for retirement. I think the problem with your graph is that you're comparing a sector to the broad market, and there is no evidence that over the next 30-40 years the real estate sector will beat the total market.
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Re: Are REITs still overvalued, as they were in 2013?

Post by NedFed »

I honestly don't know if U.S. REITs are overvalued or not; however, I sold two thirds of my VNQ shares today in my traditional IRA and took new positions in VTV and VBR. I also observed in Morningstar's Instant X-ray tool that a hefty 9.2% of VBR is comprised of real estate. After today's trade, VNQ was reduced from 13% to 5% of my overall portfolio allocation and about 7% of my equity stake.
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Re: Are REITs still overvalued, as they were in 2013?

Post by swaption »

InvestorNewb wrote:Here is what keeps me ambitious about REITs:

Portfolio 1 = Total US Stock Mkt
Portfolio 2 = Intl Stock Market
Portfolio 3 = REITs


Image

Image

Source: http://www.portfoliovisualizer.com

They appear to be a superior asset class if you look at historical returns. This is why I don't mind having a higher allocation to them (15-20%).
Let me ask you this, how relevant would the performance of bond funds over the past 5 years (for example) be in terms of formulating expectations for the future? It's easy for many to understand that the decline in interest rates that has fueld past performance of bonds directly correlates to diminished expectations for the future. Not impossible to imagine something very similar going on with REITs. In other words, the data you are looking at could lead many (including those that have worked through the supporting analytics) to come to the exact opposite conclusion as yours.

But why are you trying to come to any conclusion at all? You don't seem to have the knowledge or experience necessary to make any of those conclusions at all relevant, even if it were possible for anyone to come to any relevant conclusions. To be honest, it seems like you are looking for a fact pattern that fits the way you want the world to be.
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Re: Are REITs still overvalued, as they were in 2013?

Post by azanon »

I would say they're certainly not priced so attractive that I'd separately own more REITs than are already represented in my overall stock indexes. If you're considering sectors, why bother with them even if they're "less overvalued". I wouldn't even consider a sector purchase unless it were undervalued, and preferably grossly undervalued. The only stock sector even beginning to fit that description for the time being is precious metal equity/basic material equity.

So by all means, own them. I own them. My total stock market fund definitely has them. But overweight now? Heck no!
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

InvestorNewb wrote:Here is what keeps me ambitious about REITs:

Portfolio 1 = Total US Stock Mkt
Portfolio 2 = Intl Stock Market
Portfolio 3 = REITs


Image

Image

Source: http://www.portfoliovisualizer.com

They appear to be a superior asset class if you look at historical returns. This is why I don't mind having a higher allocation to them (15-20%).
Is that 15% - 20% of equity or the total portfolio?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Are REITs still overvalued, as they were in 2013?

Post by lazyday »

azanon wrote:undervalued, and preferably grossly undervalued. The only stock sector even beginning to fit that description for the time being is precious metal equity/
How do you value PM equity?
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Re: Are REITs still overvalued, as they were in 2013?

Post by John3754 »

InvestorNewb wrote:
John3754 wrote:Performance chasing is a poor strategy.
I don't consider a long-term plan performance chasing. Everyone looks at how their funds have fared in the past; it's part of devising a good plan.
Except:

A) What exactly is this "good plan" of yours? To look at past history and overweight the sectors that have outperformed the total market in the past? You come on this forum periodically and ask questions like "is now a good time to buy into REITs?" or "why should someone not be 100% EM?". This doesn't sound like someone with a solid long term plan, it sounds like someone who is fixated on past performance, both recent and distant. As others here often say, you're driving by looking in the rear view mirror.

B) Swaption hit the nail on the head, you are looking at past performance and making the assumption that this same performance will repeat itself going forward, which may or may not be the case. As was said, others would look at this same data and come to the exact opposite conclusion, that past outperformance will most likely lead to poorer performance going forward.
Last edited by John3754 on Fri Feb 14, 2014 2:43 pm, edited 2 times in total.
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Re: Are REITs still overvalued, as they were in 2013?

Post by InvestorNewb »

swaption wrote:Let me ask you this, how relevant would the performance of bond funds over the past 5 years (for example) be in terms of formulating expectations for the future? It's easy for many to understand that the decline in interest rates that has fueld past performance of bonds directly correlates to diminished expectations for the future. Not impossible to imagine something very similar going on with REITs. In other words, the data you are looking at could lead many (including those that have worked through the supporting analytics) to come to the exact opposite conclusion as yours.

But why are you trying to come to any conclusion at all? You don't seem to have the knowledge or experience necessary to make any of those conclusions at all relevant, even if it were possible for anyone to come to any relevant conclusions. To be honest, it seems like you are looking for a fact pattern that fits the way you want the world to be.
I wouldn't formulate expectations for the future based on a 5-year period. Even though I'm a newb myself, I don't believe that anyone has the knowledge or experience necessary to make such conclusions. But I'm more in favor of 'the best predictor of the future is the past' when it comes to investing decisions over long periods. Sure someone can get fancy with P/E ratios and other metrics, but I'm not a strong believer that they are reliable indicators either.
abuss368 wrote:Is that 15% - 20% of equity or the total portfolio?
REITs currently represent about 15% of my portfolio, which is all equity. I may up this to 17% with my next RSP contribution.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Are REITs still overvalued, as they were in 2013?

Post by Kevin M »

I voted "don't know". Very smart people can present strong arguments that something is overvalued or undervalued. However investors in aggregate ("the market") establish the values, so in a sense, saying something is under- or over-valued is an oxymoron. This is another way of saying that markets are relatively efficient.

For the last few years my target allocation to REITs has been a fixed dollar amount with rebalancing band boundaries of -10%/+25%. This has resulted in rebalancing in and out several times in the last few years, generating nice rebalancing profits. Last transaction was a purchase on 6/20/13. Prior to that last transaction was a sale on 4/30/13 (I was only about 20% above target at the time, but wanted to raise cash for a CD purchase, so I cheated on my rebalancing bands). Note that less than two months elapsed between the last sale (20% above target) and last purchase (10% below target), but since then no rebalancing has been triggered.

Currently I am about 3.4% over target. Even though some say REITs are overvalued, I don't know whether my next transaction will be a purchase or a sale, since REITs may become even more "overvalued" before the market realizes it. For now my rebalancing band boundaries remain at -10%/+25%, but if REITs were to drop fast enough, I might extend my lower rebalancing band. My investment policy is not set in stone.

REITs happen to be about 13.5% of my US equities now. But since my equity allocation is only 30%, and 60% of that is US stocks, REITs are only about 2.43% of my portfolio. No, that's not enough to swing the dial much at the portfolio level, but the same could be said of any of my equity slices; my US large-cap blend slice is only 4.44% of portfolio.

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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

Kevin M wrote:I voted "don't know". Very smart people can present strong arguments that something is overvalued or undervalued. However investors in aggregate ("the market") establish the values, so in a sense, saying something is under- or over-valued is an oxymoron. This is another way of saying that markets are relatively efficient.

For the last few years my target allocation to REITs has been a fixed dollar amount with rebalancing band boundaries of -10%/+25%. This has resulted in rebalancing in and out several times in the last few years, generating nice rebalancing profits. Last transaction was a purchase on 6/20/13. Prior to that last transaction was a sale on 4/30/13 (I was only about 20% above target at the time, but wanted to raise cash for a CD purchase, so I cheated on my rebalancing bands). Note that less than two months elapsed between the last sale (20% above target) and last purchase (10% below target), but since then no rebalancing has been triggered.

Currently I am about 3.4% over target. Even though some say REITs are overvalued, I don't know whether my next transaction will be a purchase or a sale, since REITs may become even more "overvalued" before the market realizes it. For now my rebalancing band boundaries remain at -10%/+25%, but if REITs were to drop fast enough, I might extend my lower rebalancing band. My investment policy is not set in stone.

REITs happen to be about 13.5% of my US equities now. But since my equity allocation is only 30%, and 60% of that is US stocks, REITs are only about 2.43% of my portfolio. No, that's not enough to swing the dial much at the portfolio level, but the same could be said of any of my equity slices; my US large-cap blend slice is only 4.44% of portfolio.

Kevin
Does the cash flow from REITs help fund retirement?
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Re: Are REITs still overvalued, as they were in 2013?

Post by azanon »

lazyday wrote:How do you value PM equity?
Things such as p/b, cash flow, insider buying, sector is down 70%. In other words, typical measures that a value-based investor might research. To be clear here, I'm talking equity, investing in real companies such as miners, not investing in pure bullion where many equity valuation metrics wouldn't apply.
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Re: Are REITs still overvalued, as they were in 2013?

Post by swaption »

InvestorNewb wrote:But I'm more in favor of 'the best predictor of the future is the past' when it comes to investing decisions over long periods. Sure someone can get fancy with P/E ratios and other metrics, but I'm not a strong believer that they are reliable indicators either.
Where did you ever get the idea that the best predictor fo the future is the past? I gave 5 years as an example for the bond market, but you just as easily could have given 30 years going back to the early 80's. Bond returns will be lower in the future, that much is certain. The cycle for REITs has had enormous winds at it's back. It has gone from being a small/fringe asset class to being what it is today. Combined with interest rates, this all gets monetized in returns. That is the way the world works. I don't really buy into all of the 'REITs are overvalued' thing. But I do buy into the view that one should expect modest returns going forward (which is likely true for most asset classes) and that any return advantage/disadvantge for REITs will likely be far less favorable than in the past. You can believe differently, but to be perfectly honest, you might have better luck believing in the tooth fairy.
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

The Blackstone Group - the biggest private equity firm on the planet does not agree. I was recently reading their reporting. They have 30% - 50% invested in real estate via direct purchasing, REITs, financing, etc.

They know more about real estate and REITs than I ever will.
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Re: Are REITs still overvalued, as they were in 2013?

Post by Kevin M »

abuss368 wrote: Does the cash flow from REITs help fund retirement?
No. The REIT fund is in a traditional IRA, and I'm not taking RMDs yet, other than from an inherited IRA.

Also, I try not to think in terms of cash flow, but in terms of total return. However, in practical terms, Social Security survivor benefits, rental income, and dividends and capital gain distributions in taxable accounts (I don't reinvest distributions) are the first sources that fund expenses, and only then do I need to look at other ways to extract cash from the portfolio (e.g., selling shares).

RMDs from my inherited IRA also contribute to funding expenses in a way, as will regular RMDS in the future, but I don't think of this in terms of the distributions from individual funds, nor really as "cash flow". I may let the distributions accumulate in a money market fund or short-term bond fund in the IRA, then take the RMD from that. Or I could sell shares of a fund to cover the RMD. But I don't really think of RMDs as "cash flow", but rather as moving funds from the tax-advantaged to taxable portion of my portfolio.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
swaption
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Re: Are REITs still overvalued, as they were in 2013?

Post by swaption »

By the way, just because I have it in front of me, JPM Asset Management provides 10 - 15 year asset class projections. For US large cap it is 7.50%, for global equity it is 7.75%, for US REITs it is 6.75%.
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Re: Are REITs still overvalued, as they were in 2013?

Post by abuss368 »

swaption wrote:By the way, just because I have it in front of me, JPM Asset Management provides 10 - 15 year asset class projections. For US large cap it is 7.50%, for global equity it is 7.75%, for US REITs it is 6.75%.
Any mention of International REITs?
John C. Bogle: “Simplicity is the master key to financial success."
swaption
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Re: Are REITs still overvalued, as they were in 2013?

Post by swaption »

abuss368 wrote:
swaption wrote:By the way, just because I have it in front of me, JPM Asset Management provides 10 - 15 year asset class projections. For US large cap it is 7.50%, for global equity it is 7.75%, for US REITs it is 6.75%.
Any mention of International REITs?
Only thing they have is unlevered European Real Estate at 6.00%.
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HomerJ
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Re: Are REITs still overvalued, as they were in 2013?

Post by HomerJ »

InvestorNewb wrote:
John3754 wrote:Performance chasing is a poor strategy.
I don't consider a long-term plan performance chasing. Everyone looks at how their funds have fared in the past; it's part of devising a good plan.
If you care about how they are valued THIS year compared to LAST year, then you don't have a long-term plan...

If you had 15% in REITs in 2013, and you still have 15% in REITs today, and you started this thread for informational purposes, all good..

If you had 5% in REITs in 2013 (because you felt they were overvalued), and you wondering if you should bump that up to 20% this year (because maybe now REITs are a good deal), you're doing it wrong.

Pick an allocation and stick with it. Tune out the noise. Do not change your AA based on what you PREDICT an asset class will do going forward.

You will fail if you try to predict the future.
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