Connect with us

Markets in a Minute

Visualizing the Real Estate Investment Universe

Published

on

This infographic is available as a poster.

Real Estate Investment

Real Estate Investment

This infographic is available as a poster.

Visualizing the Real Estate Investment Universe

From residential property to data centers, real estate investment covers many different sectors.

While office, retail, and residential properties may come to mind first, the investment landscape extends to property types like health care and infrastructure—two sectors that were booming in 2021 as demand for laboratory space increased and facilities underpinning the digital economy expanded.

In this Markets in a Minute from New York Life Investments, we show the scope of U.S. publicly listed real estate investment trusts (REITs) by sector.

How Do REITs Work?

Most often, REITs are publicly-listed investments on a stock exchange. These investment vehicles manage income-producing properties and provide investors exposure to the real estate industry both through the price appreciation of property assets and the income earned through mortgages or leases.

By law, roughly 90% of this taxable income must be distributed to stockholders in dividends.

For instance, an office REIT may own a number of skyscrapers and office buildings that collect leases from tenants. This income from tenants—such as Salesforce or Amazon—would then be distributed to shareholders of the office REIT.

Today, U.S. publicly-listed REITs own 503,000 properties across the country valued at $2.0 trillion.

What are the Different Types of Real Estate Investment?

U.S. listed REITs fall into roughly 17 categories, according to data from Nareit.

Below, we will show each sector based on their earnings in the first quarter of 2022 as measured by funds from operations (FFO). FFO looks at cash flow earned from operations and is considered a broad performance indicator for the industry.

SectorEarnings*
Retail$3.5B
Infrastructure$2.7B
Residential$2.4B
Industrial$1.8B
Health Care$1.8B
Apartments$1.7B
Office$1.6B
Self Storage$1.3B
Shopping Centers$1.2B
Free Standing$1.2B
Regional Malls$1.1B
Data Centers$0.9B
Specialty**$0.8B
Diversified$0.6B
Lodging/Resorts$0.5B
Single Family Homes$0.4B
Manufactured Homes$0.3B
All Equity REITs$18.0B

*Measured by Funds From Operations (FFO).
**Specialty includes gaming, outdoor advertising, farmland, and other non-traditional REIT property types. Data as of Q1 2022.

Despite thousands of storefronts being shut down during COVID-19, retail earnings remained the largest across all sectors, at $3.5 billion. In fact, earnings bounced back to pre-pandemic levels during the first quarter of 2022.

As the second largest sector, infrastructure saw $2.7 billion in earnings, rising over 47% compared to the first quarter of 2021. Infrastructure includes wireless infrastructure, fiber cables, and energy pipelines.

Residential, at $2.4 billion, is the third largest sector. Like retail, earnings have exceeded pre-pandemic levels, rising over 19% since the end of 2019.

Overall, real estate investment earnings hit a record $18 billion, driven by sectors hit hardest by the pandemic.

Key Characteristics of Real Estate Investments

Thanks to long-term leases—often between 5 and 10 years—REITs provide stable dividend earnings to investors. In 2021, the average dividend yield of U.S. REITs was 2.6%, more than double the yield of the S&P 500 at 1.2%.

In addition, they are often well-positioned during inflationary environments. As the below table shows, during periods of high inflation REITs average annualized returns were 16%. Even better, REIT earnings increased as inflation levels continued to rise.

Inflation EnvironmentU.S. REIT Price ReturnU.S. REIT Income ReturnTotal Annualized Return
High Inflation (>6.3%)5.3%10.7%16.0%
Moderate Inflation (2.0%-6.3%)6.2%6.9%13.1%
Low Inflation(<2.0%)4.9%5.1%10.0%

Source: Morningstar (Jun 2021). REIT returns represented by the FTSE Nareit Equity REITs Index from Jan 30, 1976 to Jun 30, 2021.

While REITs are often positively correlated with inflation, they often have a low correlation with equities. For this reason, they can serve as a key diversifier when markets take a turn for the worse, potentially reducing the risk profile of your portfolio.

Due to the combination of these factors, real estate investments have proven resilient, with many REITS paying higher dividends than other forms of investments.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Markets in a Minute

How Small Investments Make a Big Impact Over Time

Compound interest is a powerful force in building wealth. Here’s how it impacts even the most modest portfolio over the long-term.

Published

on

This bar chart shows the power of compound interest and regular contributions over time.

How Small Investments Make a Big Impact Over Time

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

Time is an investor’s biggest ally, even if they start with just a modest portfolio.

The reason behind this is compounding interest, of course, thanks to its ability to magnify returns as interest earns interest on itself. With a fortune of $159 billion, Warren Buffett largely credits compound interest as a vital ingredient to his success—describing it like a snowball collecting snow as it rolls down a very long hill.

This graphic shows how compound interest can dramatically impact the value of an investor’s portfolio over longer periods of time, based on data from Investor.gov.

Why Compound Interest is a Powerful Force

Below, we show how investing $100 each month, with a 10% annual return starting at the age of 25 can generate outsized returns by simply staying the course:

AgeTotal ContributionsInterestPortfolio Value
25$1,300$10$1,310
30$7,300$2,136$9,436
35$13,300$9,223$22,523
40$19,300$24,299$43,599
45$25,300$52,243$77,543
50$31,300$100,910$132,210
55$37,300$182,952$220,252
60$43,300$318,743$362,043
65$49,300$541,101$590,401
70$55,300$902,872$958,172
75$61,300$1,489,172$1,550,472

Portfolio value is at end of each time period. All time periods are five years except for the first year (Age 25) which includes a $100 initial contribution. Interest is computed annually.

As we can see, the portfolio grows at a relatively slow pace over the first five years.

But as the portfolio continues to grow, the interest earned begins to exceed the contributions in under 15 years. That’s because interest is earned not only on the total contributions but on the accumulated interest itself. So by the age of 40, the total contributions are valued at $19,300 while the interest earned soars to $24,299.

Not only that, the interest earned soars to double the value of the investor’s contributions over the next five years—reaching $52,243 compared to the $25,300 in principal.

By the time the investor is 75, the power of compound interest becomes even more eye-opening. While the investor’s lifetime contributions totaled $61,300, the interest earned ballooned to 25 times that value, reaching $1,489,172.

In this way, it shows that investing consistently over time can benefit investors who stick it through stock market ups and downs.

The Two Key Ingredients to Growing Money

Generally speaking, building wealth involves two key pillars: time and rate of return.

Below, we show how these key factors can impact portfolios based on varying time horizons using a hypothetical example. Importantly, just a small difference in returns can make a huge impact on a portfolio’s end value:

Annual ReturnPortfolio Value
25 Year Investment Horizon
Portfolio Value
75 Year Investment Horizon
5%$57,611$911,868
8%$88,412$4,835,188
12%$161,701$49,611,684

With this in mind, it’s important to take into account investment fees which can erode the value of your investments.

Even the difference of 1% in investment fees adds up over time, especially over the long run. Say an investor paid 1% in fees, and had an after-fee return of 9%. If they had a $100 starting investment, contributed monthly over a 25-year time span, their portfolio would be worth over $102,000 at the end of the period.

By comparison, a 10% return would have made over $119,000. In other words, they lost roughly $17,000 on their investment because of fees.

Another important factor to keep in mind is inflation. In order to preserve the value of your portfolio, its important to choose investments that beat inflation, which has historically averaged around 3.3%.

For perspective, since 1974 the S&P 500 has returned 12.5% on average annually (including reinvested dividends), 10-Year U.S. Treasury bonds have returned 6.6%, while real estate has averaged 5.6%. As we can see, each of these have outperformed inflation over longer horizons, with varying degrees of risk and return.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Markets in a Minute

What Were the Top Performing Investment Themes of 2023?

In 2023, several investment themes outperformed the S&P 500 by a wide margin. Here are the top performers—from blockchain to AI.

Published

on

The Top Performing Investment Themes in 2023

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

While the S&P 500 rebounded over 24% in 2023, many investment themes soared even higher.

In many ways, the year was defined by breakthrough announcements in AI and the resurgence of Bitcoin. At the same time, investors looked to nuclear energy ETFs thanks to nuclear’s growing role as a low carbon energy source and the war in Ukraine.

This graphic shows the best performing investment themes last year, based on data from Trackinsight.

Blockchain ETFs Lead the Pack

With 82% returns, blockchain ETFs outperformed all other themes in the U.S. due to the sharp rise in the bitcoin price over the year.

These ETFs hold mainly bitcoin mining firms, since ETFs investing directly in bitcoin were not yet approved by regulators in 2023. However, as of January 2024, U.S. regulators have approved 11 spot bitcoin ETFs for trading, which drew in $10 billion in assets in their first 20 days alone.

Below, we show the top performing themes across U.S. ETFs in 2023:

Theme2023 Performance
Blockchain82%
Next Generation Internet80%
Metaverse59%
FinTech54%
Nuclear Energy50%
Cloud Computing49%
AI/Big Data49%
Gig Economy48%
Digital Infrastructure & Connectivity43%

As we can see, next generation internet ETFs—which include companies focused on the internet of things and new payment methods—also boomed.

Meanwhile, nuclear energy ETFs had a banner year as uranium prices hit 15-year highs. Investor optimism for nuclear power is part of a wider trend of reactivating nuclear power plants globally in the push towards decarbonizing the energy supply. In fact, 63 new reactors across countries including Japan, Türkiye, and China are planned for construction amid higher global demand.

With 49% returns, AI and big data ETFs were another top performing investment theme. Driving these returns were companies like chipmaker Nvidia, whose share price jumped by 239% in 2023 thanks to its technology being fundamental to powering AI models.

Top Investment Themes, by Net Flows

Here are the the investment themes that saw the highest net flows over the year:

Theme2023 Net Flows
Robotics & Automation$1,303M
Nuclear Energy$997M
AI/Big Data$987M
Global Infrastructure$734M
Net Zero 2050$716M
Blockchain$357M
Cannabis & Psychedelics$270M
Emerging Markets Consumer Growth$203M

Overall, ETFs focused on robotics and automation saw the greatest net flows amid wider deployment of these technologies across factories, healthcare, and transportation actvities.

The success of AI large language models over the year is another key factor in powering robotics capabilities. For instance, Microsoft is planning to build a robot powered by ChatGPT that provides it with higher context awareness of certain tasks.

Like robotics and automation, AI and big data, along with blockchain ETFs attracted high inflows.

Interestingly, ETFs surrounding emerging markets consumer growth saw strong inflows thanks to an expanding middle class across countries like India and China spurring potential growth opportunities. In 2024, 113 million people are projected to join the global middle class, seen mainly across countries in Asia.

Will Current Trends Continue in 2024?

So far, many of these investment themes have continued to see positive momentum including blockchain and next generation internet ETFs.

In many cases, these investment themes cover broad, underlying trends that have the potential to reshape sectors and industries. Going further, select investment themes have often defined each decade thanks to factors like technological disruption, geopolitics, and the economic environment.

While several factors could impact their performance—such as a global downturn or a second wave of inflation—it remains to be seen if investor demand will carry through the year and beyond.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Popular