The REIT recovery proves the market gurus wrong (again)

When it comes to the markets, conventional wisdom has taken quite a beating during the pandemic.

When the initial wave of COVID-19 infections sent stocks plunging last February, many analysts saw a long, difficult bear market ahead, fearing the pandemic would cause deep damage and lasting changes to the economy.

What followed was the fastest recovery in history. After a 37% decline to March 23, the Canadian market advanced 56.7% to the end of November. In the U.S., stocks dropped 35% and rebounded 63.9% (in U.S. dollars).

What the pessimists missed was the positive impact of huge government aid programs for households and businesses alongside similarly large injections of liquidity by central banks.

The gurus were particularly gloomy about prospects for real estate investment trusts (REITs). It seemed a no-brainer that REITs were in for a long spell of difficulty.

With the closure of offices, many employees were working from home—3.4 million of them at the height of the lockdowns in March. At the same time, people were embracing online shopping as never before, either because shops and malls were shut or because they simply wanted to avoid crowds.

Market observers concluded that commercial real estate companies would be badly wounded when tenants abandoned office, retail and hospitality spaces for good. Observers are great at predicting what we already know.

Then, Pfizer, Moderna and AstraZeneca announced successful vaccine trials. The world suddenly looks a lot different than it did even two months ago. Now, the news is dominated by vaccine roll-out strategies. How soon? Who first?

As a result, Canadian REITs have been on a roll. The S&P/TSX Capped REIT Index increased 17% in November.

For investors, there are several lessons to be drawn from REITs’ turbulent year.

• It’s proof once again that market forecasters are no better at predicting the future than you or me.
• Analysts and investors are prone to extremes of pessimism and optimism, especially when their imaginations are captured by narratives like the impact of work from home and e-commerce on real estate.
• Diversification is critical. While the entire REIT market has been hurt by the pandemic, the damage has been much worse for individual trusts exposed to the retail, office and hotel sectors.
• Patience and rebalancing work. It’s not easy to watch your investment go down, but the rebound in REIT prices shows why rebalancing your portfolio back to target asset allocation (buying REITs in this case) was so important even in the darkest times.

When your portfolio is composed of sound asset classes like stocks, bonds and REITs that are globally diversified, there will always be one part of the portfolio that lags the rest. That is inevitable in a well-designed investment plan. It is the decisions we make in the face of underperforming asset classes that lead to long-term investing success.