REITs attract investors' money amid sluggish stock, bond markets

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By Anna J. Park

While both the stock and bond markets have been turning bearish amid stagflation concerns, real estate investment trusts (REITs) are attracting investors' money, according to the Korea Exchange (KRX) on Thursday.

The bourse operator's REITs Infra Preferred Balanced Index ― where more than 70 percent of the included stocks are REITs ― increased by 3.2 percent in April, while the benchmark KOSPI fell by 2.27 percent during the same period.

If the period is extended to three months, REITs' impressive performance during the bearish market conditions is even more evident. The 19 REITs listed on the Korean stock markets logged an average increase of 13.3 percent over the past three months, while the KOSPI only increased by 2 percent.

Overall, the entire market cap of the 19 listed REITs stood at 8.63 trillion won ($6.8 billion), as of the end of April, which is a 9 percent jump from the previous month. The market cap of listed REITs nearly tripled from two years ago, when the local market size was only at around 3 trillion won.

In the past four weeks alone, some 700 billion won flowed into the REITs in the local stock market, as their stable dividends of about 4 percent to 6 percent a year have started to appeal to domestic investors amid volatility in the stock and bond markets. Actually, the traditional investment maxim of allocating assets evenly between stocks and bonds for generating solid profits has been losing ground, as both the stock and bond markets have turned bearish.

"The rapid inflation lowers the average expected returns of following traditional asset allocation strategies, due to the fall of bond prices as well as the increase of the stock discount rate," Kim Sang-hoon, an analyst at KB Securities, pointed out.

On top of that, the global trend of reopening sectors restricted previously is also contributing to REITs' increased popularity. As most real estate assets included in listed REITs are office buildings, shopping malls and hotels, they are expected to see some benefits from those economic sectors becoming more active.

REITs are also considered a safe asset against rising inflation. While locally listed REITs' average dividend rate stood at 7.1 percent in 2020, the number will likely be over 5 percent for this year as well.

"REITs does not create earnings by selling goods or services; rather they generate profits with real estate assets. As inflation could be reflected in rents, the operating profits of REITs are expected to continue increasing," said Kang Kyung-tae, an analyst at Korea Investment & Securities.

Yet some analysts warned that the REITs' performance could be limited if stagflation occurs, as the economic recession could affect the real estate market as well.

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