How a seasoned real estate investor advises recession-proofing your REIT portfolio: balancing enough 'defensive' sectors with the right 'difficult' ones
- Investors can prepare their REIT portfolios for a recession in two ways, according to Leonberg Capital President Jussi Askola, an experienced investor in the space.
- He told Business Insider that investors should focus on "defensive" property sectors and avoid being over-reliant on "difficult" ones heavy on hotels and retail.
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Jussi Askola began investing in REITs about 10 years ago, and has invested in various markets including the US and Germany. He told Business Insider that for a downturn like this, it's hard but worthwhile work to find the right balance in your portfolio.
Currently the president of Leonberg Capital, a boutique investment research firm, Askola is also a former private equity real estate investor and the author of "High Yield Landlord," a top-ranked real estate service on Seeking Alpha, an online platform that provides stock market insights and financial analysis.
Since March, investing in REITs has been volatile. As The Wall Street Journal reported, traditionally stronger sectors like offices, hotels, and retail have suffered while REITs heavy in data centers and cell towers are likely to see an increase in value as the world adjusts to social distancing.
In the midst of the coronavirus pandemic, Askola gave Business Insider two pieces of advice for investors who are trying to prepare their REIT portfolios for an economic downturn.
1. Focus on investing in "defensive" property sectors.
Healthcare REITs, self-storage REITs, and industrial REITs are a few examples of what Askola called "defensive" property sectors that can prove sturdy during a recession. You want to look at places that typically have long-term leases, he added.
"A long-term lease reduces the risk for the landlord because it provides more consistency and credibility with their cash flow," he explained. "If you have a high-credit tenant that is in a 10-year lease, even during poor economic times, that tenant is very unlikely to default on their lease and therefore you're going to keep getting your steady rent payment."
On the contrary, if you have a tenant with a one-year lease and the economy enters a recession, there's a risk that the tenant won't renew the lease when it expires, leaving you with an empty property, Askola explained.
2. Be careful with hotels and retail, but pay attention to certain "difficult" REITs.
In today's crisis, hotels and retail stores are heavily impacted.
"People are sitting home in quarantine and they aren't going out, they aren't traveling, and they are not spending money in malls," Askola said.
Obviously, he said, hotels generally perform the worst in recessions because people have lower budgets for vacations, and they don't have leases like other property sectors and rely on guests instead.
But he added that if you want to get out of hotels, it's still important to make sure you're keeping your portfolio diverse. You don't want to be too defensive and just go for the REITs that are most likely to be recession-proof, he explained.
With the REITs facing more difficulty trading at massive discounts to the more "defensive" REITs, he said you don't want to avoid them completely, because some might turn around after you bought them for a relative bargain.
"It's important to have a good balance of difficult REITs and defensive REITs for the long run," he said.
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