Real estate, the biggest stock market opportunity in 2022?

In the 1830s, Baron Nathan Rothschild famously wrote a phrase: “Buy when there’s blood in the streets.” And with the SP500 down 20% since the beginning of 2022, things are starting to smell like a slaughterhouse on Eid Day. Especially for the real estate sector, which has fallen as much as the market. And yet, real estate is arguably the only lifeline we have left in the face of the impending crisis and recession. Contrary to what everyone thinks, as usual.

A look back at performance since the beginning of 2022

You’ve probably noticed that for several months now, we’ve been witnessing a significant market sell-off that has pushed almost all sectors into a downward trend. The SP500 is down 20% since the beginning of the year, the CAC40 is down 16%, the Nasdaq is down 30%, and the VNQ US real estate ETF is down 20%. In this context, it’s important to take a step back to determine where it’s most efficient and wise to invest your money.

Tech stocks

Although technology stocks have declined the most, they have recorded massive gains in recent years. As a result, they are not all at particularly cheap valuations. Tech stocks are also the most affected by the current high inflation and rising rates, as the bulk of their cash flow isn’t current but rather an estimate of the future. As for the SP500, the index has also recorded huge gains, thanks in particular to tech stocks, which are the heaviest, and despite the current decline, many do not consider the index to be undervalued.

Investing in real estate on the stock market – The smart investor

At the same time, real estate companies are completely different. The price of the US listed real estate index is rather flat and almost the same as five years ago, despite solid fundamentals and a strong appreciation in real estate prices during this period. If real estate companies have been such poor performers in recent years, it’s because the market preferred to favor stocks with higher growth. Then came the pandemic, which has had an even more negative impact on this sector to this day. Because even though, like all sectors, real estate has rebounded significantly since the 2020 crash, it is one of the few that is still at lower levels than pre-pandemic levels.

“Why?”

It seems the market wrongly considers real estate companies to be generally offices, shopping centers, and hotels, which suffered greatly during the pandemic and have an uncertain future with the rise of remote work, e-commerce, and apartment rentals between individuals. Investors preferred to invest in competitors of this type of real estate company, such as Zoom, Amazon, and Airbnb. But the truth is that less than 10% of real estate companies invest in offices, shopping centers, and hotels. The vast majority of real estate companies today invest in defensive sectors that have, on the contrary, benefited from the pandemic. Such as e-commerce warehouses, data centers, telephone towers, apartments, prefabricated homes, forests, farmland, etc. These subsectors have exploded. Rents have increased, property values ​​have reached an all-time high, and the real estate companies behind them are paying increasingly high dividends thanks to accounts that have never been so green.

In short, we are facing a market inconsistency, to quote the founder of Bricks, where real estate companies are much cheaper than they could be, and this inconsistency is just waiting to be exploited. And just before looking at the numbers behind why we should invest in real estate companies now, let’s look at why we should invest in real estate and real estate in general.

Real estate will always be there, driven by demand.

For the simple reason that real estate is a “good” that will always be in demand.

Real estate is not a plane ticket we can do without this year, but rather a vital need. Humanity will always need a place to live, work, do business, take care of ourselves, have fun, and store things. As long as this remains a fact—and it always will be—real estate companies will always have a market to address. People will always need a place to live, like this residence offered by the Nexity company in Marseille. People will always have a place to get medical care, like this hospital proposed by Medical Properties Trust in California. People will always need to communicate through cell towers like this one proposed by American Tower in Germany. In the same way, people will always need warehouses from which to buy their products online, like this warehouse proposed by STAG Industrial and rented by Amazon. And I could go on with other examples for a long time, but you get the idea. The need for high-quality real estate will never disappear, and with a growing population, the value of this property tends to increase over the long term, beyond the crises and bubbles along the way.

Why Invest in Real Estate – The Smart Investor

Why should you invest in real estate?

1st reason to invest in real estate

First, studies show that real estate companies outperform the rest of the market during periods of high inflation. One study showed that between 1972 and 2021, real estate companies generated an average of 13.4% per year in years when inflation was above 7%, while the SP500 generated 7.7% per year over the same periods. This made sense for the simple reason that the positive impact of inflation on rents and property prices is much greater than the negative impact of rising interest rates. 2nd Reason

Second reason: studies show that real estate companies outperform the rest of the market during periods of slowdown and recession. As you can see on this economic cycle curve, during both slowdowns and recessionary periods, real estate companies in blue outperformed the SP500 in orange. Between 1991 and 2018, we see that, on average, real estate companies generated 7.1% per year during slowdowns, while the SP500 generated -0.2%. During recessions, real estate companies generated -9.6% annualized, while the SP500 generated -17%. And if REITs outperform during these periods, it’s not a magic trick, but for specific reasons.

First, the lease agreements signed between tenants and real estate companies are generally multi-year. This means that Amazon will not sign a one-year contract with STAG Industrial for a warehouse, but rather a 5, 10 or even 15-year contract.

And second, leased properties are generally the last thing a company will abandon in the event of an economic crisis. For example, a company like LVMH would prefer to lay off 50% of its employees rather than abandon its flagship store on the Champs-Élysées, leased by the real estate company Gecina.

And finally, the third and final reason why I think now is the time to invest in real estate companies: once again, studies show that real estate companies have outperformed the markets three, six, and even twelve months after an interest rate hike.

• S&P 500 Performance Chart Over the Last 20 Years – The Smart Investor
• This chart compares the 20-year average performance of the S&P 500 and real estate companies before and after an interest rate hike. We see on the right side of the graph, that is, after a rate hike, that three months later, real estate companies returned +4.2% while the SP500 returned +2.7%. Six months later, real estate companies returned +8.6% while the SP500 returned +5.2%, and 12 months later, real estate companies returned +17.5% while the SP500 returned +9.7%.
• Which real estate stocks can we invest in?

Of the 10 sectors in which I’m invested, the real estate sector ranks third in terms of return on investment, with a capital gain of 8% after energy and healthcare. This data comes from Moning. I’m not going to talk about my four stocks because it’s not very interesting and everyone knows them, but I’m going to talk about four other stocks whose fundamentals I really like but which I can’t buy because I don’t have 1,000 stocks to track.

First stock

Very little known yet incredible:

Agree Realty Corporation. It’s a small American real estate company with a market capitalization of $5 billion and owns 1,500 properties across the United States. This real estate company specializes in commercial properties, specifically single-tenant stores. Its clients are extremely high-quality and, above all, resilient to e-commerce and recessions, such as Walmart, which represents 6% of Agree’s revenue. It also owns Autozone, the largest American retailer of aftermarket automotive parts and accessories. It also owns Bank of America, Best Buy, Burger King, Chase Bank, Costco, CVS, Home Depot, KFC, Lowe’s, Tractor Supply, AT&T, Verizon, and many others. The quality of Agree’s properties and tenant clients is simply exceptional, and the company continues to accelerate the acquisition of premium rental properties. 74% of Agree’s clients have a credit rating between triple A and triple B.

Agree Realty Corporation Statistics – The Smart Investor The stock yield is 4% per year with an average dividend safety score and an average dividend increase of 6% per year, distributed continuously for 28 years, despite a decline in 2011. Moreover, this company pays a monthly dividend. With very good revenue, earnings per share, and margins, and a stock at its fair value, what more could you ask for?Agree Realty Corporation Dividend History – The Smart Investor

Second Stock

I really like this one:

Medical Properties Trust . A specialist in healthcare facilities with over 440 properties in over 10 countries, including Germany, Italy, and Switzerland, shared by over 50 tenant clients. Medical Properties Trust Statistics – The Smart InvestorNo single property accounts for more than 3% of Medical Properties’ revenue, but only 3 tenants do.

more than 50% of the property company’s revenue. This proportion is gradually reducing over time, but the property company remains heavily dependent on these three clients. The share yield is 8% per year, with a safe dividend safety rating and an average dividend increase of 4% per share, distributed uninterruptedly for 17 years. From a fundamental perspective, whether it’s revenue, earnings per share, or margins, we are once again looking at quality.

Medical Properties Trust Dividend History – The Smart Investor

Considered the rising star of Wall Street, or should I say Las Vegas, I’m talking about

, one of the largest owners of leisure properties: hotels, casinos, nightclubs, and restaurants. The company has been in existence since 2017 and owns more than 40 gaming establishments, hundreds of restaurants and bars, four championship golf courses, and 12 hectares of vacant land in Las Vegas. It owns half of the Las Vegas casinos, including Caesars Palace, Mandalay Bay, the Venetian Resort, the Luxor, and the Mirage. 90% of Vici’s rental income comes from three casinos: Caesars, MGM, and the Venetian. This is obviously a very lucrative real estate subsector, but it’s important to understand the inherent risk of Vici, which is that it is heavily concentrated in Las Vegas. The yield is 4.7% with a borderline dividend and an average annual growth rate of 9%.

Vici Statistics – The Smart Investor Vici Dividend History – The Smart InvestorFourth Stock

. It’s quite simply a company that will rent large hangars full of servers to companies, often tech. The company is present in more than 26 countries including France with more than 290 data centers rented to more than 2,300 customers including Amazon, IBM, Google, LinkedIn, Adobe, Facebook and Verizon. This real estate sub-sector is the one with the most long-term growth potential as the importance of data and the cloud is increasingly greater and imperative as demonstrated by the explosion in the figure.

of Digital Realty’s business over the last 10 years. The annual yield is 3.6% with a dividend considered extremely safe, increased on average by 6% per year and distributed without interruption for 18 years.

Digital Realty Trust dividend history – The Smart Investor

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