REITs and Rising Interest Rates

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risingqSince March 2009, the FTSE NAREIT All Equity index of US real estate stocks has has nearly quadrupled. When will the party end? Mathematically, we know that bond values will go down in general if interest rates rise. But how would rising interest rates affect future REIT performance?

Here are some articles that examine historical REIT performance relative to interest rates: A Wealth of Common Sense, AllianceBernstein Blog, and Altegris Whitepaper [pdf].

The TL;DR version is that based on historical data, an increase in interest rates will not necessarily hurt REIT prices. Sometimes it did, sometimes it didn’t. Out of the seven past periods of rising interest rates, REIT performance was positive in four of them and sometimes they kicked butt. The average statistical correlation between REITs and bonds is very low. On top of that, the actual correlation oscillates from positive to negative. Sometimes REITs and rates move in the same direction, and sometimes they move in opposite directions.

Using predictions of future interest rates to further make predictions of future REIT performance seems doubly silly.

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Comments

  1. One should not look at rising interest rates in isolation. If interest rates are a sign of improved business activity, and increased inflationary activity, then chances are building occupancy could increase, rents could increase etc.

    Also the dividend stream of a REIT will likely increase over time, whereas a bond’s interest payment is fixed. Thus increases in rates could have temporary impact in the short run, but in the long run, an investor with a 10-15-20 year horizon should do fine.,

    Most REITs on my list are not cheap however. If one looks selectively however, they could find a few decent values out there.

  2. DavidAnnArbor says

    Wow my Vanguard REIT index has grown huge this year. I thought it had some connection with the long term treasury bond rates going down for the year.

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