16 Jun 2019 These tax loopholes literally “print money” when interest rates fall. So, with Fed Chair Jay Powell signaling that rate easing is on the way, we 10 Jul 2017 Many investors associate REITs with interest-rate risk, however in practice Theoretically, if the increase in interest rates is met by an offsetting 17 Jan 2020 REITs are negatively impacted by rising interest rates in the same ways as utilities—their borrowing costs go up, and they may become less 3 Feb 2020 “REITs would do well in a low-interest-rate environment. In particular, retail REITs are expected to be resilient as high tenant occupancy 3 Apr 2019 Some REITs even continued increasing their dividend throughout the recession. Here's a look at REIT sectors we believe will outperform. 1- Net
12 Oct 2018 Investors also need to keep an eye on their real estate investment trust (REIT) investments, particularly mortgage REITs. Many of these REITs are
8 Feb 2014 As REITs rely on debt to finance its property acquisitions, they will incur a higher borrowing cost in the event of higher interest rates. When money 26 Mar 2015 Wilson Magee of Franklin Real Asset Advisors® takes a look at investing in real estate investment trusts (REITs) in a rising interest-rate 8 Aug 2017 Canadian REITs tend to have longer-term leases and less tenant turnover, meaning fewer opportunities for landlords to raise rents. 13 Sep 2017 The common perception is that a rising interest rate environment is negative for Real Estate Investment Trusts. (“REITs”), with REITs being a 12 Oct 2018 Investors also need to keep an eye on their real estate investment trust (REIT) investments, particularly mortgage REITs. Many of these REITs are
What could go wrong: The big risk, as with any kind of income-oriented investment, is rising interest rates. Mortgage REITs accentuate the risk of rising rates
Thus, in order to grow, REITs need to raise external debt and equity capital from investors. As a result, higher interest rates increase a REIT’s cost of debt and make it incrementally harder to achieve profitable growth. A real estate investment trust (REIT) must pay out at least 90% of its taxable profit as a dividend to shareholders, which makes REITs relatively high-yield instruments. In fact, from the perspective of total return - dividends plus price appreciation - REITs behave like a typical small-cap stock. Interest expenses also are not likely to rise much as rates move higher, because nearly all the borrowings of REITs are fixed-rate debt. And, REITs have extended the average maturity of their debt to 75 months, locking in these low interest rates until well into the next decade.
In the chart above, there are periods where REITs and rates moves are positively correlated and thus have a direct positive relationship (i.e. interest rates go up/down as REIT prices go up/down).
In the chart above, there are periods where REITs and rates moves are positively correlated and thus have a direct positive relationship (i.e. interest rates go up/down as REIT prices go up/down). As REITs require borrowing to develop properties, a rise in interest rates would essentially mean a rise in the cost of borrowing. A higher cost of borrowing would mean that REITs are taking a higher risk of default. Thus, in order to grow, REITs need to raise external debt and equity capital from investors. As a result, higher interest rates increase a REIT’s cost of debt and make it incrementally harder to achieve profitable growth. That’s especially true because REITs frequently use secondary offerings (i.e. they sell new shares) to raise growth capital. Higher interest rates from the Fed are primarily a reaction to stronger economic conditions. In a strengthening economy, many REITs will be able to raise rents, make attractive acquisitions and most importantly, grow dividends. About two-thirds of all REITs are currently growing dividends paid to shareholders.
17 Jan 2020 REITs are negatively impacted by rising interest rates in the same ways as utilities—their borrowing costs go up, and they may become less
old questions on the relationship between Real Estate Investment Trusts (REITs) and rising interest rates. Contrary to popular belief, we find little empirical * The data suggests an increase in the Fed Funds rate may not be a driving force behind the movement of REIT prices. Eight Periods of. Rising Rates. *Date range