Will REITs do well when interest rates rise?
Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.
This is because when interest rates rise, it becomes more expensive for Reits to borrow money to refinance their loans, resulting in an erosion of their dividends. On top of that, returns from yield products like fixed deposits and government Treasury bills were also on the rise, competing for investors' capital.
The REIT has a Zacks Rank #2 at present. The Zacks Consensus Estimate for the retail REIT's 2023 FFO per share has been unchanged over the past month. Despite this, the estimate figure suggests year-over-year growth of 2.3%.
REITs have access to capital and are acquiring assets, making it a good time to invest. REITs historically rebound when interest rates pivot and have the potential for rent growth.
As interest rates rise, they can depress the price of these REITs. So while dividends may climb with interest rates, the price of publicly-traded REITs may decline. Historically, REITs are one of the better-performing sectors during inflationary periods.
Therefore, if rates begin to rise then REIT cash flows will decline at a time when discount rates are rising. They fear the end result will be capital losses that offset the higher distribution yield and result in negative total returns.
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023. Based on historical experience, the convergence of the wide valuation gap between public and private real estate will likely ensure continued REIT outperformance into 2024.
What I wish I knew before investing in REITs?
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
“Both public and non-public REIT investments should be considered long-term, and that could mean different things to different folks, but in general, investors who typically invest in REITs look to hold them for a minimum of three years, and some of them could hold them for 10+ years,” Jhangiani explained.
The trend started to reverse in late 2023, with the REITs posting a 17.9% return for the fourth quarter. And it will likely continue in 2024 as multiple factors converge to create a favorable environment for the sector, according to REIT fund managers.
REITs historically perform well during and after recessions | Pensions & Investments.
Some of the worst investments during high inflation are retail, technology, and durable goods because spending in these areas tends to drop.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
| Symbol | Fund name | 1-year return |
|---|---|---|
| BRIUX | Baron Real Estate Income R6 | 12.08% |
| JABIX | JHanco*ck Real Estate Securities R6 | 11.07% |
| RRRRX | DWS RREEF Real Estate Securities Instil | 9.26% |
| CSRIX | Cohen & Steers Instl Realty Shares | 9.84% |
During the past 25 years, REITs have delivered an 11.4% annual return, crushing the S&P 500's 7.6% annualized total return in the same period. Image source: Getty Images. One reason for REITs' outperformance is their dividends.
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
What causes REITs to go up?
Rising interest rates and expectations of future changes in monetary policy have at times impacted the share prices of equity REITs. However, increases in interest rates often are driven by economic growth that may support the growth of REIT earnings and dividends in the future.
Commercial property investments can provide a high and potentially rising rental income and some capital growth over the long term. REITs often have long-term lease agreements with tenants, which can help to make rental income and dividends paid relatively reliable.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
| Company (ticker symbol) | Sector | Dividend yield |
|---|---|---|
| Chimera Investment (CIM) | Mortgage | 14.3% |
| KKR Real Estate Finance Trust (KREF) | Mortgage | 14.0% |
| Two Harbors Investment (TWO) | Mortgage | 14.0% |
| Ares Commercial Real Estate (ACRE) | Mortgage | 13.8% |
| # | Name | M. Cap |
|---|---|---|
| 1 | Prologis 1PLD | $96.25 B |
| 2 | American Tower 2AMT | $80.28 B |
| 3 | Equinix 3EQIX | $71.57 B |
| 4 | Welltower 4WELL | $54.08 B |
