Real estate is a fickle beast. People will always need a place to live, and businesses will always need offices, warehouses and stores, so it is unlikely that the demand for buildings, whether residential or commercial, will completely decline.
That said, the real estate market is complex and, like other asset categories, cyclical and tends to experience both booms and busts. Factors such as inflation, interest rate changes, recessions, wages, and even evolving workplace norms can all destabilize demand for homes, offices, and other types of real estate.
Investing in real estate companies, REITs, construction equipment makers, mortgage providers, and other real estate-adjacent assets may seem straightforward when demand is expected to rise. But what if you think real estate is overvalued and expect the housing and property market to fall in value? What are practical ways to bet that the real estate industry will lose value?
Callout Real estate, like healthcare, industrials and technology, is a cyclical asset category that rises and falls in value over time, but the market is notoriously difficult to time, according to Michael Barry. Winning big on well-timed bare bets, such as , is usually the exception, not the rule. Always proceed with caution when speculating, avoid putting all your eggs in one basket, and don’t invest more than you can afford to lose.
1. Short (or buy a put option) a particular REIT
A REIT (Real Estate Investment Trust) is a publicly traded company that owns or finances income-generating properties and distributes most of the profits to its shareholders as dividends. Many of these specialize in specific types of real estate (hotels, rental properties, storage facilities, student residences, etc.).
If you expect a particular segment of the real estate market to lose value (rather than the sector as a whole), your best option is to short a specific REIT that specializes in properties in the real estate sector you want to bet on.
For example, if investor analysis leads you to believe that the travel and lodging industry may decline in the next year or two (perhaps because wages are not keeping up with inflation or pandemic-related travel restrictions). , an investor may choose to: Sell short one or two of her REITs that specialize in hotels, resorts, or vacation rentals.
The key here is that to short a REIT (or any other stock) you need to have a brokerage account that allows you to borrow the stock. First, identify one or more REITs that you want to short. Then decide how long you think it will take for these companies to go down in value. Borrow the stock for the appropriate period and sell it at the market price. If the analysis proves correct, the company will lose value and will have to buy back the shares at a lower price and return them to the broker, pocketing the profits.
Even if your analysis (or timeframe) turns out to be inaccurate, you still need to buy the stock to return it to your broker, which can cost as much (or more) than it did to sell it. Please note in particular.
Even if your brokerage doesn’t allow you to borrow shares, you may still be eligible to trade options. In that case, you can buy a put option on the REIT that you believe will lose value. Consider your maturity date carefully, as you will only make a profit if the REIT’s price falls below the strike price by an amount greater than the premium you paid for the contract prior to the maturity date. If this happens, the contract can be resold for profit.
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2. Shorting a specific stock (or buying a put option)
Alternatively, you can short a specific stock (or a few) related to the real estate market (for example, major homebuilders such as DR Horton and NVR).
It’s important to remember that traditional stocks tend to be more volatile than REITs, as REITs are valued primarily for their high and regular dividends. This means that while shorting individual homebuilder stocks may provide more potential upside, it also means more risk.
If investors notice housing starts declining during a period of high inflation and slowing wage growth, they may be inclined to bet that homebuilding stocks will suffer as a result. . From the broker he can borrow stock in one or more homebuilders, sell it immediately at the market price, buy it back when the price drops, and then return the borrowed stock to the broker.
Alternatively, you can purchase and resell put options in the same company in the same manner as described in the REIT section above.
3. Shorting a Real Estate ETF (or Buying a Put Option)
If you’re generally bearish on real estate and want to reduce risk by shorting a wider variety of real estate-related assets, you can also consider shorting (or buying puts) real estate ETFs. Some of these include only REITs and are more dividend-focused, while others include REITs and homebuilders, mortgage lenders, materials companies, and more.
If the time horizon is relatively long, the latter, more diversified type of real estate ETF may be the best choice. This is because different components of the real estate space can fall at different times, and one category (such as home builders) can fall. Declining demand has a cascading effect that later shakes up other categories (such as building material suppliers and mortgage providers).
4. Invest in the Inverse/Bear Real Estate ETF
If you want exposure to the declining real estate sector but don’t want to worry about the hassles of using derivatives or borrowing stocks, you can also invest in Inverse or Bear ETFs. These are pooled investment vehicles that use derivatives and short-selling techniques to generate profits instead of investing directly in a set of themed securities, instead of investing in a set of the same themed securities. lose value.
For this reason, investing in a Real Estate Bear ETF is the easiest way to bet on the housing and construction market with a traditional brokerage account.
Note, however, that many inverse ETFs are highly leveraged to double their returns. This means that your losses will also double. For example, the ProShares UltraShort Real Estate ETF has 2x leverage. In other words, a 1% loss in the value of the missing asset will result in a 2% increase. Or 5% increase and 10% loss if assets are short.
Leveraged Inverse ETFs are extremely risky and should be approached with caution and caution. For risky real estate investors with lower risk tolerance, unleveraged inverse ETFs may be a better option.
Conclusion
Real estate tends to be overvalued somewhat cyclically, but it’s also closely tied to factors like inflation, wages, and Fed action, so it’s not easy to tell when booms and busts are.
The above are just a few ways to expose your portfolio to possible sector downsides in the event of a bearish situation, but as with any speculative investment decision, be sure to do your research and consider the risks involved and their significance. please. Maintain a balanced and diversified portfolio to avoid wasting savings on inaccurate forecasts.