Real estate is a fickle beast. People will always need a place to live, and businesses will always need offices, warehouses and storefronts, so demand for buildings—whether residential or commercial—is unlikely to decrease entirely.
Having said that, the real estate market is complex, and like other asset classes, it tends to be cyclical, experiencing booms and busts. Factors such as inflation, changes in interest rates, recessions, wages and even changing workplace norms have the potential to destabilize demand for homes, offices and other types of real estate.
If you expect demand to rise, investing in real estate companies, REITs, construction equipment manufacturers, mortgage providers and other real estate-adjacent assets may seem like a no-brainer. But what if you think real estate is overvalued and you expect the housing and real estate market to fall in value? What are some practical ways to bet on the real estate industry losing value?
Note While real estate – just like healthcare, industrials and technology – is a cyclical asset class that appreciates and depreciates over time, it is well known that the timing of any market is Very difficult, well-timed short bets like Michael Berry’s to win big are usually the exception rather than the rule. When speculating, be cautious, avoid putting all your eggs in one basket, and never invest more than you can afford to lose.
1. Short (or long put) on specific REITs
REITs (Real Estate Investment Trusts) are publicly traded companies that own or fund income-producing real estate and distribute the majority of profits to shareholders as a dividend. Many of these specialize in specific types of real estate (such as hotels, rental properties, storage facilities, or student accommodation).
If you expect a segment of the real estate market (rather than the entire industry) to depreciate, your best bet may be to short a specific REIT that specializes in the real estate industry you want to bet on.
For example, if an investor’s analysis leads them to believe that the travel accommodation industry is likely to decline in the next year or two (perhaps due to wages not keeping up with inflation or pandemic-related travel restrictions), They may choose to short one or two REITs that invest exclusively in hotels, resorts, or vacation rentals.
It’s important to note here that in order to short a REIT (or any stock, for that matter), 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. Next, determine how long you think it will take for these companies to fall in value. Borrow shares for the appropriate term and sell them at market value – if your analysis proves correct, these companies will be the ones before you’re asked to buy back the shares at a lower price and return them to your broker will lose value, thereby pocketing your gains.
Keep in mind that if your analysis (or your time frame) proves to be inaccurate, you will still need to buy shares to return to your broker, and they may cost sold them as much (or more) as you.
If your brokerage does not allow you to borrow stock, you may still be eligible to trade options, in which case you can buy put options on REITs that you think will depreciate. When doing this, be sure to consider the expiration date carefully, as you can only make a profit if the REIT’s price is below your strike price by an amount greater than the premium you paid on the contract before the expiration date. If this happens, you can resell the contract for a profit.
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2. Short (or buy) specific stocks
Alternatively, you can short specific stocks (or a few) involved in the housing market (for example, major homebuilding companies such as Dr. Houghton or NVR ).
It’s important to remember here that traditional stocks tend to be more volatile than REITs, as REITs are valued primarily because of their high and regular dividends, so their share prices tend not to be drastic Volatility. This means that shorting individual homebuilding stocks may offer more potential upside, but also higher risk.
If investors notice a drop in housing starts during a period of high inflation and sluggish wage growth, they may be inclined to bet that homebuilding stocks will suffer as a result. They can borrow stock in one or several homebuilders from a broker, sell it immediately at market value, buy it back when the price falls, and return the borrowed stock to the broker.
Alternatively, they can buy and resell puts on the same company in the same manner as described in the REITs section above.
3. Short (or Buy) Real Estate ETFs
If you are short on real estate in general and want to reduce risk by shorting more diversified real estate-related assets, you may also consider shorting (or buying into a put) real estate ETF. Some of these only include REITs and are more focused on dividends, while others include REITs as well as homebuilding companies, mortgage lenders, materials companies, and more.
If you have a longer time horizon, it is better to choose the latter, more diversified real estate ETFs, as different components of the real estate space may fall at different times, while one category (such as housing A drop in builders) could have a knock-on effect, subsequently shaking other categories (such as building material suppliers or mortgage providers) due to lower demand.
4. Invest in Contrarian/Bear Market Real Estate ETFs
If you wish to invest in the Real estate, but without the hassle of using derivatives or borrowing stocks, you can also invest in inverse or bear market ETFs. These are pooled investment vehicles, instead of investing directly in a series of thematic securities, they use derivatives and short-selling techniques to profit when the same series of thematic securities loses value .
Therefore, investing in real estate short ETFs may be the easiest way to bet on the real estate and construction markets with a traditional brokerage account.
However, please note that many inverse ETFs are highly leveraged to increase returns, which means that any losses are also multiplied. For example, the ProShares UltraShort Real Estate ETF is leveraged at 2x, meaning that if its short assets lose 1% of their value, it will gain 2%. Or, if the asset it shorts rises 5%, it loses 10%. Leveraged inverse ETFs are extremely risky and should be used with caution Trading. For risky real estate shorts with lower risk tolerance, unleveraged inverse ETFs may be a better option.
BOTTOM LINE
Real estate tends to be periodically overvalued to some extent, But it’s also tied to factors like inflation, wages and the actions of the Federal Reserve, so trying to time its booms and busts isn’t easy.
If you feel bearish, the above are just a few ways to try to expose your portfolio to a possible decline in the sector, but as with any speculative investment decision, be sure to do your research and consider the implications risks and the importance of maintaining a balanced and diversified portfolio so that inaccurate forecasts do not end up draining your savings.
