Are REITs Beneficial During a High-Interest Era? (2024)

When interest rates rise, investors run for cover towards any good asset that they can find. Alternative investments, like real estate investment trusts (REITs), can be a good option, depending on the market cycle. Let's see how REITs performed during periods with high and low-interest rates.

REIT Recap

A REIT is a publicly traded security that invests in real estatethroughpropertiesormortgages, and are available onmajor exchangeslike stocks. As a result, REITs offer high levels of liquidity (a rare quality when dealing with real estate). The trusts often specialize in specific property types, such as residential apartments, commercial buildings, warehouses, or hotel facilities. REITs are also available in regional variants, concentrating on real estate in specific countries/regions like the U.S., Europe, China, or Japan.

REITs offer many benefits, including diversification, the aforementioned liquidity, a small amount of investment, income distribution, and tax benefits (depending upon local laws). (For more, see: Key Tips for Investing in REITs.)

REIT Returns vs. 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. In a growing economy, the demand for financing also increases, resulting in increased interest rates. Conversely, in a slowing economy, when the Fed is tightening money, the relationship turns negative. This relationship can be seen in the following chart, which details the correlation between REIT total returns and the yields on 10-year Treasuries from 2000-2019.

For the most part, REIT returns and interest rates had a positive correlation, moving in the same direction. This is evidenced primarily between 2001-2004 and 2008-2013. The periods of inverse correlation, right after 2004, 2013, and 2016, all relate to Fed monetary tightening policies, reversing the actions of monetary stimulus actions that were put into place mainly after recessions. Here interest rates rose but REIT values decreased.

Further bolstering this argument is a study done by the , which analyzed six periods beginning in the 1970s where the yield of the 10-year Treasury grew significantly. The study compared the increased interest rates to REIT and stock performance during those periods. The information is presented in the following table.

Of these six periods of interest rate increases, REIT returns increased during four of them and outpaced the stock market during three of them.

However, there are other factors and other detailed observations to consider, which may indicate positive or negative returns for REIT investments depending on the interest rate environment.

The biggest factor is that not all REITs are created equal. First and foremost, REITs operate in many types of industries. These include healthcare, hotel, residential, industrial, and many more. Each of these industries has different variables in play that react differently to the economic environment. Another important factor is the debt profile of a REIT; how much financing they take on to grow their business. The debt profile determines a REITs ability and timeframe to pay down debt, which will be impacted by different interest rate environments.

The observations discussed indicate that REITs may not really have any dependency on interest rates scenarios and that there are many other factors at play in determining how a REIT will perform during times of different interest rates. The returns from REIT investments may actually remain free from interest rate variations. As with any investment, it is crucial to look at the specific REIT in question, its performance, dividend payout history, and debt levels.

REIT Benefits to Investors

There are other benefits of REITs, which make them a good investment choice during varying interest periods:

Income Opportunity

REITs are considered yield-based securities. While they can appreciate in price, a considerable portion of REIT returns is from dividends. REITs avoid having to pay corporate tax if they distribute at least 90% of their income to their unitholders.This tax break results in a regular distribution of dividend income to REIT shareholders, and the effective net yields are often higher than the ones from bonds (or stocks), even in cases of high-interest rates.

Global Diversification

REITs offer exposure to global markets. Since the 1990s,the U.K., Singapore, Japan, Australia, the Netherlands, South Africa, and many others countries have enabled REIT listings, allowing investors to take exposure in real estate markets of foreign nations. For example, if the local real estate market in the U.S. tanks due to the effects of higher interest rates, a U.S. investor with exposure to the Singapore real estate market can benefit if he holds REITs in Singapore in his portfolio.

Sector Specific Exposure

In the event of rising interest rates, not all the sub-sectors within real estate may get hit adversely. For example, residential rents may suffer, but shopping centers in prime locations may not. Careful study of the real estate market, the impacts of interest rates on a specific sub-sector, and on specific REITs based on its underlying property holdings, can make REIT investments profitable no matter the interest rate impact.

The Bottom Line

After looking atcorrelation patterns and historical data, it appears thatreturns from REITsvary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates. After careful study and proper selection of real-estate sub-sectors and geographic regions, investors can consider REITsa good investment for diversification alongside traditional stocks and bonds.

Are REITs Beneficial During a High-Interest Era? (2024)


Do REITs benefit from higher interest rates? ›

REIT Stock Performance and the Interest Rate Environment

Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns.

How beneficial are REITs? ›

REITs typically pay higher dividends than common equities. REITs are able to generate higher yields due in part to the favorable tax structure. These trusts own cash-generating real estate properties. REITs are typically listed on a national exchange and provide investors considerable liquidity.

Do REITs perform well in a recession? ›

REITs historically perform well during and after recessions | Pensions & Investments.

Why are REITs performing poorly? ›

Interest rate risk

The biggest risk to REITs is when interest rates rise, which reduces demand for REITs. 6 In a rising-rate environment, investors typically opt for safer income plays, such as U.S. Treasuries. Treasuries are government-guaranteed, and most pay a fixed rate of interest.

Why do higher interest rates hurt REITs? ›

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.

Do REITs benefit from inflation? ›

Finally, as owners of real assets, REITs typically enjoy an appreciation in portfolio value along with the price level. With rents and values tending to increase with prices, REIT dividends help provide a reliable stream of income even during inflationary periods.

What is the downside of REITs? ›

Here are some of the main disadvantages of investing in a REIT. Market volatility: Value can fluctuate based on economic and market conditions. Interest rate risk: Changes in interest rates can affect the value of a REIT.

What I wish I knew before buying REITs? ›

REITs must prioritize short-term income for investors

“They pay out stable dividends, provided the properties are doing well,“ says Stivers, the financial advisor from Florida. In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock.

Are REITs a good investment in 2024? ›

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.

How often do REITs go out of business? ›

Bankruptcies are extremely rare in the REIT sector. After all, REITs are required to keep the bulk of their assets in physical properties, or debt backed by real estate. Most real estate tends to appreciate over time, and as long as it holds its value, a REIT can sell properties to pay down debt in a pinch.

What is the future outlook for REITs? ›

As the REIT industry continues to evolve, its future growth prospects remain promising. According to the reports, the global REIT market is projected to reach a staggering $5.8 trillion by 2030, growing at a CAGR of 7.1% during the forecast period of 2023-2030.

What is the outlook for REIT funds? ›

AEW Capital Management forecasts total REIT returns of approximately 25% over the next two years, which also roughly translates to low double digits in 2024, according to Gina Szymanski, managing director and portfolio manager, real estate securities group for North America, with the firm.

What happens to REITs when interest rates fall? ›

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

Can REITs go to zero? ›

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. That's not to say that REIT values can't go down, though.

Have REITs outperformed the S&P 500? ›

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.

What happens to REITs when interest rates decrease? ›

Give us cheap REITs (real estate investment trusts) because they are likely to rise as rates fall. Yes, that's what happens in a recession. Investors flood into fixed income. Interest rates fall, and REITs—which tend to move opposite rates—rise.

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