Have you ever wondered what happens to REIT shares when the market crashes?
Let me explain it simply: during financial crises, REIT shares often swing wildly in price—not because the buildings they own have suddenly lost value, but because investors rush to sell. Even the strongest real estate portfolios can see their stock prices drop sharply when panic hits the market. That’s the impact of liquidity stress.
Introduction: Liquidity’s Vital Role in REIT Performance
Liquidity refers to the ease with which an asset can be bought or sold in the market without impacting its price significantly. In calm, stable conditions, liquidity helps keep REIT share prices close to their intrinsic value. But during financial crises, liquidity can dry up. This makes it harder for investors to exit positions without accepting steep discounts.
For REITs—especially publicly listed ones—this can lead to sharp price swings even if the actual real estate continues to generate income. In regions like the Gulf or North Africa, where REIT markets are still maturing, the impact of liquidity stress can be even more pronounced due to thinner trading volumes and lower investor awareness.
Understanding how liquidity stress affects REIT share volatility is essential for investors across Arab countries seeking both income and diversification in their portfolios.
What Are REITs and Why Do Investors Buy Them?
REITs (Real Estate Investment Trusts) are companies that own, manage, or finance income-producing real estate. These can include commercial buildings, shopping centers, hospitals, warehouses, residential towers, or even hotels.
Investors buy REITs for several reasons:
- High dividend income: REITs are legally required to distribute most of their profits to shareholders.
- Access to real estate without owning property: This provides diversification and liquidity compared to directly owning a building.
- Stock market flexibility: REITs are traded like regular shares, meaning they can be bought or sold easily on exchanges.
However, this last point—liquidity—can also be a weakness. Because REIT shares trade on stock markets, they are vulnerable to investor sentiment, just like any equity. In times of financial panic, their prices can drop quickly, even if the underlying properties are still performing well.
What Is Liquidity Stress?
Liquidity stress occurs when assets can’t be sold quickly without a significant drop in value. In normal times, a healthy REIT market has enough buyers and sellers to allow smooth trading. But during a crisis, that balance disappears.
Investors rush to sell assets. Cash becomes king. Buyers become scarce. The result? REIT shares may drop not because the real estate has collapsed—but simply because there are more sellers than buyers. This mispricing can last for weeks or months, depending on the severity of the crisis and the health of credit markets.
Liquidity stress also affects the REITs themselves. These companies often rely on debt to acquire and manage properties. In a crisis, banks may become cautious. Refinancing maturing loans becomes difficult or expensive. If rental income drops at the same time—as it often does in retail or hotel sectors—REITs face a double shock.
Historical Crises and REIT Volatility
The 2008 Global Financial Crisis
The global financial crisis was triggered by the collapse of the U.S. housing market and the subprime mortgage bubble. As banks failed and credit froze, REITs saw their share prices fall by more than 70% in many markets.
This sharp decline was not purely based on real estate performance. Many REITs continued to collect rent from tenants and had stable portfolios. However investor fear was high, and liquidity was low.
Those REITs that survived were typically the ones with strong balance sheets, low debt, and reliable tenants. Over time, many of them rebounded, showing that short-term volatility can mask long-term value.
The 2020 COVID-19 Pandemic
When the pandemic hit in early 2020, entire economies shut down. Office buildings emptied. Hotels closed. Retail stores faced lockdowns. The result was immediate and widespread REIT share price declines.
However, not all sectors were affected equally. Hotel and retail REITs dropped by more than 50% in a matter of weeks. Office REITs were also hit hard. In contrast, industrial and logistics REITs—especially those supporting e-commerce—remained resilient. Some even grew in value due to the surge in online shopping.
The lesson from COVID-19 was clear: REIT performance during crises depends not only on liquidity but also on the type of properties held.
Why Are REITs Vulnerable During Crises?
Even though REITs are based on tangible assets—land and buildings—they behave like financial instruments on the stock market. This makes them sensitive to broader market conditions and investor psychology.
Several factors contribute to REIT share volatility during periods of liquidity stress:
Stock-Like Behavior
Since REITs are publicly traded, their shares are influenced by news, interest rate changes, and general market sentiment—just like any stock. This means that in a market crash, REITs can drop even if their real estate assets are unaffected.
Dividend Commitments
REITs are required to distribute most of their earnings. This leaves them with less financial cushion during emergencies. When rental income drops, it can quickly affect their ability to pay dividends—something investors worry about during crises.
Debt Dependency
REITs often use borrowed money to grow. This leverage can boost returns in good times but becomes dangerous in bad times. If banks tighten credit, REITs may struggle to refinance loans or continue operations without selling properties.
Investor Panic
In uncertain times, even well-informed investors may sell REITs simply to raise cash. This causes share prices to fall further, creating a feedback loop of declining confidence and rising volatility.
The Arab Region: A Developing REIT Landscape
REITs are a relatively new concept in many Arab countries. Saudi Arabia has made notable progress, with over 15 REITs listed on the Tadawul. The UAE also has several REITs in Dubai and Abu Dhabi, focused on residential and commercial real estate. Egypt is in earlier stages of REIT development, with evolving regulations and market frameworks.
These markets often have lower daily trading volumes and fewer institutional investors compared to the U.S. or Europe. This thinner liquidity can amplify volatility during market downturns. A small number of transactions may push prices sharply up or down.
Political uncertainty, currency risks, and economic cycles also influence investor behavior in the region. These factors mean that liquidity stress may impact Arab REITs more severely than in mature markets.
Still, the long-term outlook is promising. As regulations improve, awareness grows, and financial infrastructure develops, REITs can become a core part of investment portfolios in the Middle East and North Africa (MENA).
Sector Differences: Not All REITs Are Equal
During crises, some REIT sectors perform better than others. Understanding these differences is essential for smart investing.
- Retail and Hospitality REITs are highly exposed to consumer activity. They are often hit hardest during economic downturns, pandemics, or travel restrictions.
- Office REITs face challenges when work-from-home trends rise or businesses downsize.
- Industrial and Logistics REITs tend to perform well in e-commerce-driven environments. Their tenants are often stable and tied to supply chains.
- Healthcare REITs are seen as more defensive, especially those that own hospitals, clinics, or senior living facilities.
By diversifying across sectors, investors can reduce risk and balance out volatility.
How Investors Can Navigate REIT Volatility
For individual investors, particularly in the Arab world, it’s important to approach REITs with a long-term mindset. Volatility during crises is uncomfortable but not always permanent. Here are several strategies for navigating such periods:
Focus on Quality
Invest in REITs with strong balance sheets, low leverage, high occupancy rates, and solid tenants. These companies are better equipped to survive and recover from liquidity stress.
Avoid Overconcentration
Don’t put all your capital into one type of REIT or one country. Diversify geographically and across sectors to spread your risk.
Understand the Market
Keep an eye on global and local economic indicators. Interest rate trends, government policy, and geopolitical events can all influence REIT performance.
Don’t Panic Sell
One of the biggest mistakes investors make is selling during a downturn. If the fundamentals of a REIT remain solid, holding on through a crisis can lead to eventual recovery and long-term gains.
Policy and Regulatory Reforms in the Region
Regulatory bodies across the MENA region are making efforts to support REIT growth. In Saudi Arabia, for example, the Capital Market Authority has introduced listing requirements, mandatory disclosures, and investment guidelines to protect investors.
The UAE has promoted real estate transparency and investor education to encourage more participation in REITs. Egypt’s Financial Regulatory Authority has been working to modernize REIT frameworks and attract institutional investors.
These reforms aim to reduce risk, increase transparency, and ensure that REIT markets are resilient during times of liquidity stress.
Long-Term Outlook: From Volatility to Value
While liquidity stress can cause painful short-term fluctuations in REIT share prices, it doesn’t change the fundamental value of high-quality real estate. For investors who stay informed, remain patient, and build diversified portfolios, REITs can be a powerful tool for income and growth.
As the Arab REIT market continues to mature, new opportunities will arise for both local and international investors. Stronger regulations, better access to information, and improved financial literacy will help reduce the impact of future crises.
Conclusion: Understanding REIT Volatility Builds Investor Confidence
REITs are attractive investments because they offer exposure to real estate with the flexibility of stock market trading. However, their shares are not immune to market shocks. Liquidity stress during financial crises can cause REIT share prices to fall, even if the real estate itself remains profitable.
For investors in the Arab world and beyond, understanding this dynamic is key to making smarter decisions. Recognizing the causes of volatility, identifying quality REITs, and thinking long-term will help you manage risk and capture the long-term benefits of real estate investing.
REIT volatility is not a reason to avoid them—it’s a reason to study them more deeply.
